Wednesday, April 21, 2010

A big flaw in the proposed financial reform bills

Mark Thoma writes:
When I was asked what was missing from the proposed financial reform legislation, I should have mentioned the lack of effective reform measures for ratings agencies, particularly the incentive to provide high ratings to encourage future business. As noted below, part of the reform legislation is directed at the ratings agencies, but it doesn't get at the main problem, which is the incentive to tell its customers what they want to hear, i.e. the incentive to deliver higher ratings than deserved. For some reason ($$$???), the ratings agencies seem to be escaping the legislative and regulatory attention they ought to be receiving.

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