Hearings Shine a Spotlight on the Conflicted World of Credit Raters

Credit rating agencies were a topic of financial reform hearings.
Credit rating agencies were a topic of financial reform hearings.

One of the more interesting observations in the Financial Crisis Inquiry Commission hearings last week came not from the witness stand, but from one of the commission members. In his questioning, Byron Georgiou, a lawyer who played a lead role in the Enron prosecutions (and pictured left), called attention to the conflicts embedded in the business practices of the rating agencies at the heart of the financial crisis -- as he termed it, "a conflict of interest of gigantic proportions."

Sure, it's often pointed out the credit rating agencies -- Standard & Poor's, Moody's Investors Service and Fitch Ratings, the only three raters designated as nationally recognized statistical-rating organizations by the SEC -- have an inherent conflict of interest, since they are paid by the very institutions who issue the securities being rated.

But that's just the start of it.