The New York Times takes an excellent and necessary look at the Big Three credit-rating firms—critically important enablers of the credit crisis—and the prospects for real reform of them. The conclusion: It’s not looking good.

At base, nearly everyone agrees that the business model of Standard & Poor’s, Moody’s, and Fitch Ratings is fundamentally flawed. The three are essentially privatized government regulators given official monopoly status (with fifty-percent-plus profit margins) by Congress several decades ago, and they’re paid by those they’re supposed to be grading. It’s a conflict of interest that goes a long way toward explaining how the process of grading those junk subprime CDO’s and RMBS got so corrupted. The whole thing is a joke.

But:

Under bills that legislators are currently considering, the rating agencies will have to contend with greater oversight, stiffer rules about disclosure and a provision that would make it easier for plaintiffs to sue the firms. But nothing in the laws tackles the critic-for-hire problem or threatens the 85 percent market share that Moody’s, S.& P. and Fitch now enjoy.

The Times drily gets at one good way for showing the legislation isn’t nearly tough enough:

The Big Three object that the legislation proposed by Congress could make them more vulnerable to legal action. But they otherwise do not sound particularly exercised about much else that is likely to become law….

“We support globally consistent, nondiscriminatory regulation that will help restore investor confidence and bring more transparency to the capital markets,” said Catherine J. Mathis, a spokeswoman for Standard & Poor’s.

Sure you do.

It’s surprising that there haven’t been prosecutions yet, though the Times points out that Ohio and Connecticut are suing them for fraud and that several other states are about to join them, “a potentially grim development for the rating agencies, which could find themselves contending with a phalanx of state officials like the one that aimed at big tobacco in the 1990s.” That’s a nice analogy.

The Times really hammers home the point that the proposed legislation is not going to do much, quoting critics calling it “strikingly weak,” “mortifying,” and “old and ineffective medicine” not much different from a toothless 2006 effort that did a whole lot of nothing.

The reporting, or some semblance of self-awareness in Congress, results in this ashamed-of-ourselves, you-busted-us spin:

One senior Senate aide, who requested anonymity because the aide was not authorized to speak, said that the bill that would reach President Obama’s desk early next year would merely be a beginning.

We’re going to get tough—later!

Don’t hold your breath. It’ll take many more good stories like this to get anything to happen.

But if you want a good example of how you hold their feet to the fire, check out the Times’s kicker. It has a perspective. It comes to a conclusion based on the facts. Does anyone besides the executives at the Big Three raters disagree?

The paradox is that everyone — even the Big Three — insist that the current system has to change. But somehow, what looked like the low-hanging fruit of financial reform is still dangling, right where it hung at the start of this calamity.

Excellent.


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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.