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Credit Rating Agencies Have Been Botching Some Important Ratings

Karen Minich-Pourshadi, for HealthLeaders Media, June 14, 2010

Some would argue that this type of action is unnecessary. After all, aren't there already safeguards in place? Yes, sort of. The Credit Rating Agency Reform Act of 2006 granted the SEC authority to inspect credit-rating agencies and required it to report to Congress on credit-rating quality and conflicts of interest or inappropriate sales practices. The ratings agencies also added their own—understaffed—internal compliance departments to keep things on the level, though honestly, how deeply are your paid employees going to dig into the company's transactions to find problems when that's their main source of income? Not that deeply. By the way the Moody's employee mentioned above who testified to the House committee was suspended from his job after he complained to the company about their practices.

Congress is gearing up to pass more financial reform legislation in the coming year, but it seems unlikely that it will do more to protect the consumers than previous legislation. The Wall Street Reform and Consumer Protection Act of 2009 passed the House in December, and asked for rating agencies to tighten internal controls, register with the SEC, bear more government supervision, and disclose more detail about their ratings methodologies. Sounds a lot like the 2006 legislation, doesn't it? But it does allow more investors to sue the agencies for gross negligence—now there's an intriguing possibility.

Another bill in the Senate, the Restoring Financial Stability Act of 2010, which calls for many of the same changes as the Wall Street Reform and Consumer Protection Act of 2009, would give the SEC authority to de-register any agency for providing grossly incorrect ratings—you have to wonder how many incorrect, or bad, ratings they'd have to give out in order to get de-registered though. I suspect that will likely be at the discretion of the SEC. Moreover, I can hear the ratings agencies arguing their cases already, "We couldn't know that Company X was swindling millions from their investors, all their financial statements looked great. It's not our fault that they lied to us."

And their argument wouldn't be totally without merit–I'm sure that companies have falsified documents to get a great rating in the past and they will do so in the future too. Nevertheless, these agencies need to step up their game and perhaps be a tad more conservative with those AAA ratings. Then again, if they maintain this poor prediction pace, they may just put themselves out of business.

As a consumer, I certainly don't place as much merit in those ratings as I once did, and neither should you. Naturally, you must be mindful not to ruin your rating, as banks will use these as measures of your stability in order to make capital lending decisions, but when it comes to investing your hospital's capital you should recognize that these ratings are just a piece of the puzzle and you need to do your own due diligence before putting your hospital's money (or your own) into any investment. After all, if the government can't find a way to regulate and penalize these folks, then it is the job of the free market to do it by not turning to them as the best source of information—because clearly they are not.


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Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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