Are Credit Rating Agencies Necessary?

" Thought about the credit rating agencies right critics of the administration's financial regulation plan say it doesn't go far enough to reform practices. I've been widely criticized credit rating agencies like Moody's and S&P. Especially since many argue those agencies share some of the blame for the crisis. Let's talk more about it joining -- now Adam Pritchard professor at University of Michigan who has done extensive study. On the rating agencies and he's -- now professor welcome to Fox Business. I guess the first question is that the most basic level. Do we need the credit rating agencies."

" Well currently we have. Model for the credit rating agencies where. Their business is actually mandated by the government so. Money market funds pension funds are required to purchase. Rated securities so there's an artificially. Created demand. Unless you eliminate that government mandate that. Issuers by the service of the credit rating agencies than we do need to credit rating agencies. It's unclear whether we would want to have them whether they could survive. Without that government mandate."

" But Adam there are two things that many people were expecting from the government and terms of regulation that would. Would Alter the way -- credit ratings rating agencies operate one of them being. The -- per prohibiting issuers from pay for the ratings but those two things didn't happen so. What is happening in terms of improving. That the quality of the ratings in the regulation of these agencies."

" Well as far as the Obama plan goes it's business as usual. Basically they the recommendations. And the white paper that came out. Last week are that the SEC should continue to do what it is doing. Which is managing. The conflict of interest. -- turning. The analysts who provide. The ratings to make sure they're not being unduly influenced by. These fees that the issuers are. Pain so. The alternative the more sweeping reform would have been to prohibit the conflict of interest the Obama administration. Decided not to go there so basically the credit rating agencies have a big victory with. The Obama plan coming out --"

" You know there's been a couple independent companies that Ian Jones or Sean Egan has been a guest here and Fitch to a smaller extent but you know they say we gotta change the way the pricing is done. Yeah it's like it's like yeah it's like a homeowner paying an appraiser. To praise his or her own home. Almost seems to be -- inherent conflict of interest is -- way to structure the industry that that would work and maybe eliminate some of them."

" Well 98%. Of the credit ratings that are issued are paid for by the issuer so. Effectively yes they're acting as salespeople. The alternative business model one that we used to have involved. Subscribers. Paying for the credit ratings and in that model it's basically. If you provide a service that the market finds valuable it will be sold and if you can't do you go out of business as I said the government mandate insurers that these great credit rating agencies. I won't go out of business but. We could have a start toward a more market based model if we prohibit. Insurers from paying for Adam B. Credit rating saying you're running out of time on the satellite window but Adam Pritchard professor University of Michigan thank you very much. Thank you."