Rating agencies and Obama's S&P case

The Justice Department case against S&P is long overdue, not necessarily because it has significant merit(to be determined) but because an examination of rating agency practices and the rules of regulation that the government has long approved need examination and focus.  What follows are a few brief thoughts as going into these issues thoroughly is being covered intensely by others and has many complex aspects.

--- Why just S&P?  What about Moody's and Fitch, especially Moody's and they and S&P are the real duopoly.  Is this just a test case against the largest that will encourage quick and easy settlements with the others, or is there another agenda here?

--- Why has the practice of investment banking underwriters paying all of the rating agency fees been sacrosanct?  While there are relationship aspects to fixed income and equity analysts in research departments at investment banking or pure research firms, there is definitely no explicit payment by corporations for research ratings and never has been.

--- Another practice is highly questionable.  Rating agencies are allowed, by practice and regulation, access to confidential information on corporations that is not available to fixed income or equity analysts at research firms, or to anyone for that matter.  Why this practice exists is inexplicable to someone who has little belief in confidentiality outside of small groups of insiders at high levels.  It gives their ratings more credibility when in some ways it should do the opposite.

--- Rating agencies do not, in general, attract top tier talent.  For the most part they do not pay enough in incentive pay except at the highest levels to do so, and their vetting process of employees talent is weak.  One old example, maybe dated but I doubt it - I had an employee who was known to me since graduate school who was always well dressed, reasonably popular among some, and had a quick, cocky, and at times insulting acerbic wit.  He gave the impression at a distance of being smart and alert.  As it turned out he was completely dysfunctional as a worker.  He rarely completed an assignment and when he did it was lame and thoughtless work, often simply lifted from the work of others.  In phone coversations with clients he was not helpful and lacked confidence.  He was let go.  Where did he find his next job?  At Moody's as and oil and gas analyst, a field in which he had no experience at all and notwithstanding the fact that he was incompetent.  Enough said.  He looked the part.

--- In the rating agencies defense, the complexity of the instruments that they were rating and are being sued about was stunning.  Since their main avenue of "research" was listening to what the underwriters and corporate issuers(think Countrywide, Bear Stearns and others) told them, both public and confidential information, they trusted them as that was their long term m.o. and their path to profits.  Almost no one outside of the most savvy underwriters understood the role of derivatives in these new issuances and the pitfalls that products like credit default swaps represented.  There was little disclosure of these risks anywhere, and many of the best research analysts and invesment management firms were in the dark as well.

--- Not in the rating agencies defense, it was in fact their role in the system to be the impartial evaluator of these securities, and they were in fact cheerleaders.  Their long time masquarade ended badly.  Now only investors like pension funds and certain mutual funds whose charters require that they follow guidelines related to issued debt ratings pay attention.  Most active investors do their own research and for the most part ignore the ratings that the SEC requires from the rating agencies.