Ending Rating Agencies' Conflict of Interest Is So Simple Even an Economist Can Do It

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Thursday, 22 April 2010 19:38
The NYT reported on how the Senate's Permanent Subcommittee on Investigations was struggling to find ways to remove the inherent conflict of interest that arises when a bond rating agency is paid by the company for whom it is doing the rating. Actually, there is no need for much struggle here. If the selection of the rating agency was assigned to a neutral party, like the Securities and Exchange Commission or the stock exchange on which the company is listed, then the agency would have no incentive to tilt its report in favor of the company. It would have been appropriate to point out that there is a simple and obvious solution to this problem, but that that the Senate for some reason is not interested in pursuing it.