Monday, April 12, 2010

Taking exception, this could cause greater conflicts.

WASHINGTON - OCTOBER 22:  Stephen Joynt (L), p...Image by Getty Images via Daylife

The tyranny of bond markets | Kevin Gallagher | Comment is free |

I generally will just not comment on something I disagree with rather than give it more attention, but this one I have to call out. It is from the Guardian.

And I have to take exception. But first here is the comment:

"The good news is that the Obama administration and Congress is set to regulate the rating agencies through financial regulatory reform legislation currently pending in Congress. The Senate bill would create an Office of Credit Ratings at the SEC to watch the agencies and the office would have the power to shut down agencies that continue to make mistakes. The House bill would create liability windows for investors to file lawsuits whereby suitors would only have to prove 'gross negligence' rather than 'actual malice'.

However, neither bill changes the 'issuer-pay' model for compensating agencies that is rife with conflicts of interest. Neither bill deals with the competition problem: the big three rating agencies' stronghold on the market will hold. Perhaps most concerning is the fact that there is much less in these bills about how government debt ratings should be regulated."

Maybe I have read Atlas Shrugged too many times, maybe I am too cynical, but I do not see this as good news. I m not sure why this is good news. True the rating agencies have messed up. But so what? Ignore them. Why pay attention to them. A good investor will due his/her own analysis and not rely on a rating agency.

Moreover, with regulation, it seems to me that the conflict of interest is MUCH greater ("if you downgrade US debt, we close you down."
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