Officials said they want rules to eliminate conflicts of interest at credit rating agencies that gave top investment grades to the exotic and ultimately shaky financial instruments that have been a source of market turmoil. The core problem, they said, is that the agencies are paid by companies to help them structure financial instruments, which the agencies then grade.
This is from Obama's team, through the NYT. It is the first time I've heard anyone express anything that would actually attack one of the root causes of our current crisis.
Basically, ratings agencies are paid to give advice on how to get a good rating. If their customers give them money, take their advice, and then do not get an increased rating, then those customers will stop giving the ratings agencies money. Perhaps unsurprisingly, the investment products of most of the clients of the ratings agencies got high ratings. That included a large number of very shaky investments (like the infamous bad loans).
Because these shaky financial instruments had high ratings, people poured their money into them. At some point, they realized the investments were, in fact, quite awful, and that the ratings agencies were not producing useful ratings. Now no one is willing to invest in anything, in large part because they don't trust the ratings agencies.
This is well-known, a major issue, and it is also the very first time I've heard any politician speak up on the matter. Restoring trust in the ratings agencies will be a huge first step to solving our problems. It is way better than shoveling money at banks in the hopes that they will start lending again. Congratulations to the Obama team.