One reason banks hold so many toxic assets now is that those assets received triple-A ratings from the major credit rating agencies.
The solution: “Abolish ratings agencies,” says Peter Fisher, co-head of fixed income at money manager BlackRock. Just close down Moody’s, Standard & Poor’s and Fitch.
It turns out that the agencies either didn’t understand the securities they were rating, or more likely, they fell in love with the fees they received from the issuers of the securities, Fisher tells The Wall Street Journal.
Because the agencies are paid by the issuers, he says, they have every incentive to give the securities high ratings.
“To create competition, we should license individuals as credit rating professionals, instead of companies,” Fisher argues.
“These professionals would be required to publicly disclose all ratings, so institutional investors can see the dispersion of ratings on any given security.”
These raters would be paid mainly by institutional investors, just like stock analysts are, Fisher says. Any fees paid to them by issuers would have to be disclosed.
“The idea that we can take this huge pool of capital being managed by institutional investors and then outsource to three or four companies the decision on what to buy and how to price it is silly,” he says.
Hedge fund manager Michael Burry agrees with Fisher’s view.
Burry, who runs hedge fund Scion Capital, wrote to his investors that “the rating agencies were horribly wrong. They were money-grubbing and sorely in need of an ethical compass.”
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