Moody’s blues

CaPERS sues the ratings agencies.

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?

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web