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Justice sues S&P: Is it time to rethink the role of ratings agencies?

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In light of the Justice Department’s lawsuit against Standard & Poor’s for its failure to rate credit mortgage operations properly – thereby contributing directly to the Great Recession – the question arises whether rating agencies themselves have run their course. At the heart of the suit against S&P is the complaint that by charging those they rate, ratings agencies operate by an inherent conflict of interest. And yet, regulatory offices widely rely on rating agencies to do the heavy lifting for them when it comes to overseeing the health of financial services firms. The way forward may be to rely on investors themselves; if they cannot understand the financial strength of a firm themselves, relying on a rating agency to do it for them might be taking on a bit too much risk.