Bill Herbert

How to Reform the Credit Rating Agencies

Great article - but I would suggest going even further in pursuit of reform.

I would create a Federal Oversight Board that collects money from the users - the investing community - and assigns the task of analysis and issuance of ratings on a random basis to a handful of rating agencies. I would keep the present three, but immediately fire any top execs who were responsible for the past egregious blunders, and bring in new, outside management that is very closely tied to investors' interests.

I would also encourage the formation of several new rating entities (hey, there are a LOT of good, unemployed analysts floating around the job pool right now - although some may be too rigidly honest to hold a job on WS under the present system that rewards the cheaters) to promote competition. And I would institute a "rate the raters" independent review system wherein the ones that did a good job were rewarded with extra business and better fees, thereby starving the slackers and the "business as usual" crowd that is presently so corrupt. Maybe people like you and a few other high-minded individuals could do voluntary two-year rotations on such a review board.

And I would go so far as to outlaw any type of influence exerted by the companies-being-rated on the analysts who are doing the DD and deciding on the creditworthiness of the issuers' paper. I wouldn't even let them buy a guy lunch, or invite her/him to a Christmas party or golf outing. Nada, zero, no bribing or arm-twisting allowed - and swift jail sentences for anybody who steps over the line.

By the way, I would strongly advocate a similar system for corporate audits, so that we can clean up that profession as well. The average audit is more of a whitewash than a thorough review of the real situation, at many companies. It doesn't help that the FASB is a joke, and that corrupt Congressmen have battled reforms for years, and have shielded the SEC from tough scrutiny until things imploded in a morass of corruption, worthless securities, Alan Stanford and Bernie Madoff, and hundreds of truly-busted hedge funds - many of which, incredibly, are still operating today as they try to "unwind" millions of dollars worth of bogus trading profits they have booked on CDS's and other flaky trades.

We haven't come near the final tally of all the bad numbers on the books of the banks, hedge funds, and WS firms. It's going to be an interesting year-end audit season, that's for sure.