Ratings Agencies Back to Their Old Tricks

Moneybox
A blog about business and economics.
Aug. 1 2013 8:42 AM

Ratings Agencies Back to Their Old Tricks

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Ratings agencies are the street meet of the financial system.

Photo by STAN HONDA/AFP/Getty Images

The classic business model of the ratings agencies is one any man on the street would immediately flag as corrupt and problematic. A bank devises a security, a bank hires an agency to rate the security, and then the security is ushered into the world with the magic blessing of the ratings agency. Obviously you're going to get a situation like the one Nathaniel Popper reports on in today's New York Times where S&P gives higher ratings than the other agencies and S&P gets a larger market share as its reward.

This dynamic did much mischief during the crisis years and it's alive and well.

Something interesting about this is that there's a fair amount of sophisticated (or "sophisticated") argumentation out there to the effect of how in an idealized marketplace this kind of certification-not-regulation should work just great. But if you look at a situation like kosher certification where you're not going to have the state step into a religious matter so you have to rely on market solutions, what you see are constant scandals over hot dogs and Passover and everything in between.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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