Credit Rating Agencies: Can't Live With 'Em, Can't Live Without 'Em


This summer's overhaul of the nation's financial regulations left far too much room for regulators to make up rules sometime in the future, meaning no one really knows how the law will work. But it turns out that a number of the provisions we do know something about aren't very feasible either:

The implementation of the sweeping financial overhaul got off to a rocky start on Tuesday, when a series of top regulators suggested Congress might have to make changes less than three weeks after President Barack Obama signed the bill into law.

Regulators meeting at the Federal Deposit Insurance Corp. expressed concern about a provision restricting the use of private credit ratings. In particular, the requirement has forced agencies to put on hold efforts to craft new capital standards for thousands of banks, particularly smaller institutions, which will likely prolong uncertainty over the rules of the road for at least a year.

FDIC Chairman Sheila Bair said poor credit ratings were a "key contributing factor" to the financial crisis but defended ratings as an effective way to evaluate the quality of investments such as corporate debt. "I think we will also find that some of the more likely replacements…are far from perfect," she said at the meeting.

Any time Washington decides to rewire a system as complex as the U.S. financial services industry based on not much more than a few months of blowhard rhetoric and a reel of cable news reports, you can pretty much count on an immediate short circuit. At this point, it's a pattern: Politicians decide it's time to "fix the system," but legislators, who tend to have minimal or no direct experience with these specialized industries, don't actually understand how the system they're overhauling works, or what's really wrong with it. So their fixes end up causing new problems, which then require new legislation, and new fixes, and new fixes for those fixes—wash, rinse, repeat, etc. When does it end? Who can say? The Journal reports only that "banks of all sizes will likely see a period of confusion with regulatory expectations in flux."