BETTER REGULATION OF THE FINANCIAL RATING AGENCIES

The failure of the rating agencies to accurately audit the derivatives market played a role in the financial collapse of 2008. In spite of all available evidence of wrongdoing there has still not been adequate regulation, including in the Dodd-Frank bill passed by Congress last year. The cozy arrangement by which the rating agencies were paid by the institutions whose derivatives and other financial products they were rating is well known.
 One solution reported by Gretchen Mortenson [1] in October was suggested by Paul Volker, former head of the Federal Reserve. It was to rotate the rating agencies on a regular basis for each financial institution, which would provide a check and balance system. Another suggestion to solve the question of compensation for the rating agencies would be by taxing the banking/investment industry institutions themselves on their financial transactions. These funds would then be used by a newly formed independent Federal agency to compensate the rating agencies based on a set fee schedule, not in any way tied to a specific rating of a financial product.
  IPPA feels that both of these plans to correct insufficiencies in regulation of the rating agencies should be implemented in the very near future to ensure that both individual and institutional investors can have confidence in the audits of the rating agencies.

1. Mortenson, Gretchen NY Times 10/22, 2011

Leave a Reply

You must be logged in to post a comment.