EDITORIAL: Ratings agencies need to be part of financial reform

Major credit rating agencies are being treated like bit players in the economic meltdown, as Congress crafts new regulations for the financial services industry. But the agencies that graded the creditworthiness of those ultimately toxic mortgage-related securities deserve higher billing as supporting actors.

The triple-A ratings they lavished on many of those flawed securities helped inflate the housing bubble and create the conditions for widespread economic carnage when mortgage defaults soared. Legislation in the Senate seeks to curtail the agencies' influence by directing government regulators to ignore these ratings when judging the safety of bonds held by banks and other investors. That's important.

But as currently crafted, the reform wouldn't eliminate the key problem: the conflict of interest created when the company that issues a bond picks, and pays, the agency that rates that bond's creditworthiness. There's too powerful an incentive for agencies to give customers what they want - the top-notch rating required for the bonds to be sold.

Congress needs to eliminate that conflict of interest. Establishing an independent clearinghouse to parcel out assignments to the ratings agencies is one approach. Increasing competition by opening up the process to players other than the handful of nationally recognized organizations is another. There are no doubt others. Congress should give the ratings process the close-up it deserves. hN