One of the factors that allowed for the proliferation of garbage finance in the bubble was the fact that bond rating agencies were willing to give investment grade ratings to complex financial instruments that they did not understand. They had incentive to do this because they were being paid by the banks whose junk they were rating. The NYT correctly points out that the Obama plan does not change this "issuer pay" system for the rating agencies. For some reason it doesn't discuss the most obvious reform: simply changing who picks the rating agency. If the rating agency was selected by someone other than the issuer, for example the stock exchange that lists the company's stock, then the rating agency would no longer have incentive to bias its rating, since the issuer would not control whether it could be selected for future business. Changing the party who selects the rating agency is much simpler than changing the party who pays, since it doesn't involve any money. (There would be a trivial amount of money needed to run a bond-rating agency assignment desk.) It is peculiar that the NYT did not discuss this obvious reform of the current system.
--Dean Baker
