Ratings agencies--Moody's in particular--have been taking a beating in the hearings of the Financial Crisis Inquiry Commission. Legislators are concerned that agencies such as Moody's may have issued irresponsibly high ratings for shaky bonds, contributing to the financial disaster. Testimony from billionaire Warren Buffet--generally acknowledged to have been none too convincing before the commission--hasn't helped: as New York Times veteran Edmund Andrews of Capital Gains and Gains puts it, "the great sage seemed nonplussed" when "asked what he would change about the structure of the ratings agencies to reduce the conflicts of interest caused when bond issuers pay the agencies for their ratings."

So what's wrong with the ratings agencies, and what should be done?

• Pure Conflict of Interest  "The corruption and/or incompetence of the rating agencies has been documented so extensively ... that it needs almost no repeating," writes the aforementioned Edmund Andrews. "Moody's, S&P and Fitch all made fortunes by handing out AAA ratings on about $2 trillion worth of securities backed by junk mortgages and worse."

• Don't Believe Buffett's Defense  Buffett thought Moody's hadn't done anything in particular wrong, although he also claimed he had no idea how it was run. Charlie Gasparino, commenting on Fox News, isn't impressed. "He owns a big piece of Moody's so of course he's going to defend it."

• Ratings Agencies Messed Up on Sovereign Debt, Too, adds Edward Harrison at Credit Writedowns. Not only have ratings agencies managed to claim "that an organization is triple A when it needs to be propped up by another level of government," but they have given "ratings to governments that are not at all reflective of the longer-term un-backstopped fiscal position they face."

• Financial Professional: Ditch Ratings Agencies  David Einhorn, president of hedge fund Greenlight Capital, thinks "one obvious lesson from the economic crisis is that we should get rid of the official credit ratings that inspire false confidence and, worse, are pro-cyclical, aggravating slowdowns and inflating booms." In The New York Times, he explains that "the recent ... crisis was attributable in large measure to capital requirements and risk models that incorrectly assumed AAA-rated securities were exempt from default risk." He doesn't think defenders of the current system should be trusted: "Given how sophisticated bond buyers use the credit rating system to take advantage of more passive market participants, it is no wonder they stress the continued need to preserve the status quo." Instead, he advocates a system whereby "each investor individually assess credit-seeking entities. Certainly, the creditworthiness of governments should not be determined by a couple of rating agency committees."

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Heather Horn