Standard & Poor’s and Moody’s are worthless and should be ignored, argue Jerome S. Fons, former managing director at Moody’s, and Frank Partnoy, a law professor at the University of San Diego.
Investors and regulators should drop rating-related language from contracts. Instead, they should return to good old-fashioned judgment.
Credit ratings can mean the difference between life and death for a company, but the agencies should get F’s for failure, Fons and Partnoy assert in an editorial in The New York Times.
“No one has been more wrong than Moody’s and S&P,” they write.
They gave stellar marks to large but troubled companies such as AIG and Lehman Brothers. Mortgage-backed assets now called toxic got AAA ratings until recently.
Yet many investors opt to buy or sell — are even required to buy or sell — based on rating. Downgrades can trigger sell-offs and panics.
“This has left us in a ratings trap,” the pair write. “As more regulators and institutions rely on ratings, the agencies have become increasingly reluctant to downgrade.”
The SEC plans to hold a roundtable next month to mull rules for credit agencies. SEC Chairman Mary L. Schapiro has said the way agencies are paid creates a conflict of interest.
They are now paid by companies whose bonds they rate, but Schapiro would like a different model.
“There have been some very thoughtful proposals out there,” she said at a Congressional hearing.
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