Active Agency

We are matching spark and flame
Caught in endless repetition
Life for life we'll be the same
--The Fixx

Jeff Macke and other commentators have been banging the drum to eliminate the credit rating agencies. The thinking is that, because so many money managers pin their actions on the credit ratings supplied by Moody's and S&P, a downgrade to, say, General Electric (GE), in a 'down' market sparks a selling stampede.

The ratings agency witch hunt seems misplaced. We should ponder instead why money managers have become so dependent on agency-sponsored ratings rather than doing their own homework.

It's not the rating agency's fault that managers mindlessly follow credit rater actions. Agency problems are not solved until principals take responsibility for their own actions.

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