CalPERS has filed suit against the three big bond ratings agencies for “negligent misrepresentation”.
Barry Ritholtz plausibly interprets the motive as vengeance, not money: the suit is timed to put the agencies in the dock when their shenanigans are coming under scrutiny in Obama’s regulatory reform. He’s also right that CalPERS, with its $180 bn under management and deep expertise, is a scary enemy. It surely has more esprit de suite than Sarkozy, who fulminated for a while then dropped the issue.
I’m no expert on this, but the key reforms to stop the endemic conflicts of interest in the current system look obvious:
* Ratings should be paid for by bond purchasers, not issuers; for example the fees could be levied by exchanges as a precondition for listing, and recouped from buyers.
* At least double the number of players to break the cosy oligopoly of three. One new agency should be based in Europe and one in Asia. The fastest way in the US is to nationalize the three, break them up, and reprivatize as mixed public/private agencies with a public-interest function, like the exchanges. But what’s to stop CalPERS from setting one up, alone or with other pension funds?
* Ratings agencies should be barred by law from giving any advice to individual bond issuers.
Any views from people who know more about this?