Ratings Agencies to Cuomo: "Don't Throw Me into that Briar Patch"

New York State Attorney General Andrew Cuomo announced an agreement with the three major ratings agency that would supposedly reform their ratings practices on mortgage-related securities. Under the agreement, the ratings agencies, Standard & Poor's, Moody's, and Fitch would be paid for their ratings, even if they had no agreement with the security issuer or underwriter. This will presumably increase their independence because they will no longer have to compete for the business. Such competition is supposedly bad because it leads the rating agencies to shade their ratings to please their customers. Now the customers will be forced to pay everyone.

Wall Street Journal article is here; New York Times article is here.

What a deal! Competition is reduced, if not eliminated. It doesn't matter if another ratings agency has a reputation for greater objectivity, or more technical competence -- if I provide a rating, I get paid. And another provision of the agreement requires public disclosure of the fees received by all ratings agencies -- now I know how much my competitors are charging. After we see everyone's prices on a few transactions, it will be much easier to gently lead prices higher, particularly in such an oligopolistic market.

What could Cuomo's office have been thinking? The ratings agencies have achieved results that they could never achieve under the antitrust laws. And they achieved this without even having to pay a fine. It is not at all clear from the Attorney General's press release what law they are alleged to have violated. Cuomo appears to simply have wanted to restructure the market. Cuomo's press release thanks the SEC for their cooperation -- doesn't anybody at the SEC have any understanding of competition, either.