Summit Notebook

Exclusive outtakes from industry leaders

Impasse over model haunts raters again

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Credit rating agencies are back in the spotlight and, just like a year or two ago, for all the wrong reasons.

Last week a U.S. Senate panel said the clout of Wall Street’s big banks and the thirst for profits drove ratings agencies to inflate ratings on subprime mortage-related products, helping to fuel the worst financial crisis since the Great Depression. Making things worse for Moody’s, S&P and Fitch, the Senators pointed to securities backed by subprime loans that Goldman offered in 2007 — now the subject of an SEC fraud lawsuit — as further evidence of questionable industry practices. Goldman has rejected the accusations.

The latest dose of self-inflicted misery for the raters is unlikely to prompt any fresh regulatory action.

The basic flaw in the whole business model is still unresolved — that the issuer being rated pays the rater and no amount of blue sky thinking over the past three years since the crisis began has come up with a better idea that works.

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