The credit crisis has lots of fathers. But the 'See No Evil, Hear No Evil, Speak No Evil' practice of the rating companies has the closest-matching DNA. Like Enron's accountants, the rating agencies knew where their bread was buttered. Now we have trillions of dollars of securities that no one is willing to touch
DALLAS (PRWEB) March 29, 2008
Burns and Kotlikoff lay much of the blame for the subprime mortgage crisis at the feet of credit rating agencies such as Moody's and Standard & Poor's, which granted asset-backed securities higher ratings than they deserved. The authors say the agencies, whose fees are paid by borrowers, acted in their own self-interest in a practice they call "insider rating."
"The credit crisis has lots of fathers. But the 'See No Evil, Hear No Evil, Speak No Evil' practice of the rating companies has the closest-matching DNA. Like Enron's accountants, the rating agencies knew where their bread was buttered. Now we have trillions of dollars of securities that no one is willing to touch," Burns and Kotlikoff write in a Universal Press Syndicate column to be published March 30 by newspapers nationwide.
"We need to put an end to insider rating. Federal Reserve Chairman Ben Bernanke should call for the establishment of an FFA -- a Federal Financial Authority."
The Federal Financial Authority: An FDA for Financial Securities
Among its responsibilities, the FFA would rate the quality of financial securities similarly to how the FDA is mandated to regulate food and drugs, Burns and Kotlikoff said.
"(The FFA) would place warning labels on subprime mortgages and securities derived from them. The FFA would also rate the safety of investment banks, insurance companies, hedge funds and commercial banks...," the authors propose.
"Wall Street risk-taking has put all of us on a knife edge between asset collapse and rampant inflation ... The first step toward a long-term solution is to establish the Federal Financial Authority and restore the credibility of our rating system."
About Burns and Kotlikoff
Scott Burns and Laurence J. Kotlikoff are authors of the soon-to-be-published Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard - Today and When You Retire (Simon & Schuster, June 2008) and of The Coming Generational Storm: What You Need to Know About America's Economic Future (MIT Press, 2004).
Burns is a newspaper columnist and author who has covered personal finance and investments for nearly 40 years. Today, he is one of the five most widely read personal finance writers in the country, according to The Dallas Morning News. In 2006, he co-founded AssetBuilder, a Registered Investment Advisor (RIA), where he serves as chief investment strategist.
Kotlikoff is a professor of economics at Boston University, a fellow of the American Academy of Arts and Sciences, and a research associate at the National Bureau of Economic Research. He was a senior economist for the President's Council of Economic Advisers during the administration of President Reagan.
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