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Upgrading the raters

US legislation regulating rating agencies should bring healthy competition to the market – if newcomers can meet the costs involved.

Just what did the ratings agencies expect? That they would get off scot-free for giving solid ratings to mortgage-backed and asset-backed securities that ultimately blew up in the sub-prime crisis? The fact that Moody’s, Standard & Poor’s and Fitch are desperately arguing against pending legislation that classes them as "experts" and makes them liable for the ratings they give out seems to imply that they don’t trust their own ability to rate bonds accurately.

The ratings agencies have been criticized for too long for potential conflicts of interest. If they are being paid by the companies issuing securities to provide a rating, then it is in their financial interest to, first, agree to provide a rating and, second, provide a rating that is acceptable to the issuing company. The agencies have long disputed the notion that they are conflicted, claiming that any such bias would damage their reputation. Well, their reputation has been damaged enough. Now is the chance for ratings agencies to instil confidence in their services by getting in line with the proposed legislation.

There are many parts of the financial reform programme that can be argued against but the stance on ratings agencies is not one of them.

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