The need for credit rating agency reform

The New York Times published an interesting article today, and an Op-ed yesterday raising the question of how the credit rating system can be improved to avoid the problem of over-inflated ratings, which helped cause the current recession. The NYT article asks why Warren Buffet hasn't spoken up about credit rating agency reform- considering that he is normally vocal about his views on the causes of the financial crisis and its potential solutions and his company owns 20% of Moody's. That company, along with Standard and Poor's, has been criticized for its role in fraudulently inflating the credit ratings of mortgage backed securities.

I like this analogy that Frank Partony, a University of San Diego Law Professor, used to explain the role of credit rating agencies in the housing market collapse:

“Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not . . . If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise.”

The rating agencies have been mislabeling the goods for a long time. “A lot of investors have been eating pork recently,. . . and they’re not too happy about it.”

Hopefully as Congress overhauls the federal financial regulatory scheme, this important piece of the puzzle will not be left out.