Wow. Our experiment is off to a great start—let's see if we can finish it off sooner than expected.
Wall Street has a demonstrated aptitude for bundling up and securitizing pretty much anything: mortgages, credit card debt, parking meter collections, naked swaps, bundles of bundles, etc. etc. So why not put this ability to good use as a way of motivating ratings agencies to care about the accuracy of their ratings? A reader emails with this elegant suggestion:
Require them to sell collateralized rating obligations. The idea is that they will bundle tranches of ratings together into a form of a put. If the tranche of, say, AAA ratings fail at a rate greater than whatever the published risk of default of the class is, they will be forced to pay a contracted amount to the purchasers.
I like it! There's no income stream associated with ratings, which is a problem, but surely one that Wall Street can solve. Instead of paying a fee for getting their securities rated, maybe issuers should instead be required to set aside 0.1% of the income stream from each of their products to be bundled into a Ratings Backed Security. Agencies would be allowed to sell half the RBS immediately, but would have to hold on to the other half for a set period of time related to the maturity period of the underlying securities.
Or something. Details are left as an exercise for the reader. But I like the out-of-the-box thinking here!