After the financial crisis of 2008, rating agencies
reassured the public that additional “internal safeguards” would prevent the
sort of over-stated ratings that had contributed to the crisis. Congress did
not deconstruct the structural conflict of interest wherein a rating agency is
tempted to overstate the rating on financial security such as a corporate bond because
the agency’s revenue would be higher if more of the bonds are sold. I contend
that reliance on a company’s internal “fire walls” is naïve, given the strong,
sustained temptation that exists as long as an institutional or structural
conflict of interest is in place. To obviate the problem, the conflict itself
must be deconstructed.
The full essay is in “Essays on the Financial Crisis and
Institutional Conflicts of Interest, both available in print and as an ebook at Amazon.
