When he filed his suit, Ohio’s attorney general, Richard Cordray, said that the “rating agencies’
total disregard for the life’s work of ordinary Ohioans caused the collapse of our housing and credit markets and is at the heart of what’s wrong with Wall Street today.”
After the suit was filed, Richard Blumenthal, Connecticut’s attorney general, said he planned to join the suit and thought that a “coalition of states” would also jump on the legal bandwagon — a potentially grim development for the rating agencies, which could find themselves contending with a phalanx of state officials like the one that aimed at big tobacco in the 1990s.
The Big Three object that the legislation proposed by Congress could make them more vulnerable to legal action. But they otherwise do not sound particularly exercised about much else that is likely to become law.
“Moody’s shares the committees’ goal of increased transparency for the ratings process,” said Michael Adler, a Moody’s spokesman.
S.& P. is equally sanguine. “We support globally consistent, nondiscriminatory regulation that will help restore investor confidence and bring more transparency to the capital markets,” said Catherine J. Mathis, a spokeswoman for Standard & Poor’s. A spokesman for Fitch declined to comment.
Without question, the credit rating system is one of the capitalism’s strangest hybrids: profit-making companies that perform what is essentially a regulatory role. The companies serve the public, which expect them to stamp their imprimatur on safe securities and safe securities alone. But they also serve their shareholders, who profit whenever that imprimatur shows up on a security, safe or not.
To make matters more complicated, rating agencies are deeply entrenched in millions of transactions. Statutes and rules require that mutual fund and money managers of almost every stripe buy only those bonds that have been given high grades by a Nationally Recognized Statistical Rating Organization, as the agencies are officially known.
But even if there is no foolproof way to reform the rating agencies, the measures that Congress is now backing are strikingly weak, a number of critics say. There is no talk, for instance, about creating a fee-financed, independent credit rating agency, one modeled along the lines of the Public Company Accounting Oversight Board, which was established to oversee auditors after the Enron debacle — an idea floated by Christopher J. Dodd, the Senate Banking Committee chairman as recently as August.
That approach would attack the conflict of interest problem head on.
Nor is anyone on Capitol Hill suggesting a rewrite of all those rules that put rating agencies in the middle of so much Wall Street action. Instead of cajoling the Big Three into producing more accurate ratings, why not take away the special status of those ratings and make them less important?