We heard numerous references to AAA rated investments at the congressional hearings yesterday. The bankers and congressmen extolling the virtues of an AAA rating as the standard for safety. How short their memories are. Remember that the sub-prime paper, auction rate preferreds, CDO's and credit default swaps that got us into this mess had AAA ratings.
Obviously the rating agencies (Standard & Poor's*, Moody's and Fitch) not only failed at the very core of their job description, but misled investors into a false sense of security regarding these securities.
A non-for-profit rating agency would eliminate the conflicts of interests and improve the overall quality of ratings. The Federal government could buy either or all of these failed rating agencies or create a new one.
Either way the new entity would give unbiased appraisals. John Templeton and Warren Buffet warned of a great looming problem from these investments. The signs were there. Where were these rating agencies whose sole purpose was to alert us to changes in credit quality before it was too late.
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There is much difficulty in accounting for where the TARP funds went to and if they were used for the intended purpose.
Placing the TARP funds in segregated accounts at the banks would have eliminated this confusion and potential misuse. Future infusions of capital into the banking system should be made this way.
This provides for optimum transparency and accountability. The funds could still be counted toward Federal capital requirements, and the uses would be primarily restricted to lending to retail and commercial customers, as was initially intended.
*I was formerly employed as a writer at Standard & Poor's In the early 80's.
http://www.time.com/time/specials/packages/article/0,28804,1877351_1878509,00.html