The NY Times’ “The Hidden Cost of Trading Stocks” paints a concise and damning picture of yet another malpractice in financial services. This has been a recurring theme.
Another storm may be brewing – this time for the credit ratings industry.
It is standard practice for issuers to hire ratings agencies to rate their securities. This practice has lead to incentives to give higher ratings when trying to get business from securities issuers, putting the ratings agencies in the position of representing the issuers when they are given special status to serve and protect investors. They are not even required to disclose the conflict of interest. The closest we get to protection is a lawsuit when they explicitly advertise objectivity.
It now looks like 16 states will each get their chance to sue individually. This may be the beginning of a big and positive change. If conflicts of interest did influence credit ratings, it would shift capital and damage economic efficiency even when it is not misdirecting pension money into a mortgage bubble. I wonder if we will see a social media movement to influence reform like we are seeing with network neutrality and “common carrier” status. I hope so.