Jonathan Weil writes that credit rating agencies like Moody’s and Standard & Poor’s should have to disclose how much their clients pay them for their services in his column, “MF’s Money Mystery Is How Much It Paid Moody’s:”
So many times when the big credit- rating companies have embarrassed themselves, the world has sighed and chalked it up to a business model that by design invites corruption and incompetence. Perhaps never before have the public’s expectations for the industry been lower.
The fundamental flaw is that the major rating companies, led by Moody’s Investors Service and Standard & Poor’s, typically are paid by the issuers of the securities they rate, or by other deeply interested parties, such as Wall Street underwriters. Too often the raters seem to be the last to know that a company they dubbed investment grade was going broke, or that a mortgage bond once deemed AAA was about to default. The public sees these things and naturally draws a link between what the raters say and how they are compensated.
Although the government can’t make the credit raters more capable, it can make them more transparent. Here’s a good place to begin: Start requiring disclosures of how much the raters’ clients pay them for their services.
Consider some of the boilerplate in Moody’s reports on MF Global Holdings Ltd., whose credit ratings were the subject of a congressional hearing yesterday. Moody’s Oct. 27 report — in which it downgraded MF Global to junk, only four days before the futures broker filed for bankruptcy — said most issuers of debt securities pay “fees ranging from $1,500 to approximately $2,500,000” for “appraisal and rating services.”
It’s anyone’s guess whether the fees MF Global paid to Moody’s fell within or outside this range. The companies know how much money changed hands. They’re just not telling us.