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Comment by Zigurd | Hacker News Reader

The big question is: Why are the rating agencies still in business? They labelled rotting poisoned rat meat as prime organic steak.

Part of cleaning up the mess should have been to create new rating agencies under regulatory probation, and to review all the rating agencies' ratings. I suspect that would hae found too many slimy things on banks' balance sheets, so instead the Fed sucked the poison out of the banks with QE.

I wonder what the quid pro quo was. I suspect if you look for anomalies between sovereign debt ratings and debt-to-gdp ratios you might find answers.

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Yup. Unfortunately, the only reason S&P, Moodies and Fitch matter is because ... wait for it ... they were named in the Securities and Exchange act of 1934 as the only agencies that banks were allowed to use. It's one of those huge unintended consequences that the scheme to make sure that commercial banks were invested in high quality securities is at the heart of a financial meltdown 74 years later.

Ratings on sovereign debt seem kind of irrelevant to me. I don't see why the agencies would have any sort of edge.

But I agree one of the most dumfounding facts of the present situation are that these rating agencies are still in business. I think the argument is that they were transparent about what methodologies they used to produce these ratings. But regardless of that, the blatant conflict of interest means this whole business model should be dead. I think Jim Simons of Renaissance Technologies made the point that it's the buyers who should pay for stuff to be rated, not the issuers. Possibly it may have worked like that in the past until the government stepped in and changed it... can't quite remember.

Ratings are besides the point. Implied "ratings" should be recoverable from the market-clearing yield on any given bond. Bond buyers should perform their own due diligence, either in-house or by paying a third party.

What good does it do to have an intermediate institution (one that has no skin in the game) suppress the perceived riskiness of certain assets and inflate the perceived riskiness of others?

Because buyers don't want to be stuck with performing all the due diligence themselves. You have to understand that investment management as a business isn't really about returns. Its about gathering assets to manage and not losing them.

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