Lose the Ratings Agencies: Rosenkranz

Robert Rosenkranz, the CEO of Delphi Financial Group, wrote an op-ed for The Wall Street Journal which puts forward what I believe many would consider the precise issue to focus on then the heaving piles of new legislation and regulation are launched on the financial services sector in coming months: the extraction of ratings agencies from the equation.

Rosenkranz writes:

Rating agencies employ quite ordinary mortals to analyze the credit risk of bonds, just as firms like Goldman Sachs and Merrill Lynch employ quite ordinary mortals to analyze the outlook for stocks. No one is shocked when equity analysts’ recommendations don’t pan out. Why should we expect any more of the rating agencies?

We should not, but the regulators have, and that is the problem. Regulators of banks, insurance companies and broker dealers have all incorporated the work of the ratings agencies into their regulations in myriad ways. Most importantly, bond ratings determine — as a matter of law — how much capital regulated institutions need in order to own the bonds.

He suggests, probably correctly, that Obama and administration should write agencies out of the system as they perform functions in a weaker manner than the wider market is able to do anyway. They were partly to blame for the collapse of AIG, although only partly, and make the system too complex than will be need in a post-downturn world.