A clearinghouse for ratings agencies
It seems like the rating-agency problem should be simple: Right now, the banks pay them to rate their securities. That creates a conflict of interest. Solve that conflict of interest and you've solved the problem.
Sadly, Kevin Drum has done a good job convincing me that ratings-agency reform is insanely complicated and most solutions will bring new problems. That said, you don't want your inability to find a perfect solution prevent you from settling on a better equilibrium. And David Raboy's idea to create a clearinghouse "to receive rating applications from securities issuers and then farm out assignments in a random or unpredictable way" might be that better equilibrium:
The funding, which could come from a financial-transaction fee, would need to cover the operations of the clearinghouse as well as the ratings process itself. The performance of the rating agencies would periodically be compared on the basis of simple, transparent criteria, such as the number of times that investment-grade bonds defaulted or lost significant value. The most accurate rating agencies could be rewarded with additional assignments. Those with the poorest records could, in extreme cases, be suspended or removed from the pool.
April 30, 2010; 12:07 PM ET
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