Rating Agencies Go On Strike

Yesterday's Wall Street Journal contained an informative article in the Money & Investing Section by staff writer Dennis Berman entitled Note to Credit Raters: Evolve or Die.

It was only by reading Berman's well-reasoned piece that I even knew that the major agencies had refused to rate a batch of securities which required those rating in order to go to market. This temporarily froze the issuance of the securities, and spurred a similarly temporary SEC ruling to allow such issuance sans ratings.

But the gauntlet has been thrown down. Stung by the recent FINREG bill, the major ratings agencies tried to scare the markets and Washington into relenting on changing the rules by which they operate. Apparently they will now incur substantial liability for their ratings, instead of the free speech exemption they have historically enjoyed.

I must say that I agree with Berman. The agencies' action was all bark and no, or very little, bite.

While I in no way agree with almost any of the basic premises of and changes made by FINREG, I do share the view that there has been a mindless tyranny of rating agencies.

In today's world, it's unclear that the agencies still contribute sufficient economic value for their work. Further, so many institutional investors foolishly relied solely on ratings from S&P, Moodys and/or Fitch that it helped bring about the financial sector meltdown, primarily involving over-rated securitized mortgages, often passed through Fannie and Freddie.

If only to break the moronic reliance on these ratings, a regulatory change is healthy. Yes, probably even leading to agencies being paid by the consumers of the ratings, not the securities or firms which are the subjects of the ratings.

Berman made a nice case for the agencies trying desperately to scare markets and regulators into submission, lest they realize how potentially antiquated and valueless the agencies have now helped to make themselves.