Why the ratings agencies can't be fixed.
The RAs are run as businesses, where the issuer is usually the customer. That creates a conflict of interest on a scale big enough to damage the whole world economy, because that is what it did.
As a headhunter for people who do maths for banks I will share that it is very clear to me that the RAs hired a few good people to look good on their brochures, but actively chose most employees who didn't "make trouble", ie think about the ratings issued.
A "trouble maker" would have pointed out that the models they used were defective. I have seen some of the models used by RAs and they a tragically bad. When I, who am only a quant headhunter call your code "a sack of garbage" you are truly lost and without any shred of competence.
They pay so badly for analysts compared to banks that it is simply impossible that their staff could do the job that the RAs say are doing.
Yes there are some good people (who I'm trying to lift out), but the average is somewhere between scary and funny.
Thus they get the result they want and save money at the same time.
The EU is trying to create its own ratings agency. Apparently they genuinely believe that the problems in Greece, Ireland, Italy, Spain, etc would quietly just go away if the RAs gave them the all clear.
We all know that the ratings from an agency specifically set up to give good ratings to EU states will have less credibility than ummm err, some guy on Google+ who shares his views freely :)
That political corruption will extend to firms that have a "good relationship" with the EU, and firms (or even countries) that anger it will find their ratings hurt.
Also the EU is astonishingly corrupt, its own auditors for years have flatly refused to sign off its accounts.
The ability to create a new source of bribes is of course highly attractive to many in Brussels.
A US Federal RA would be even worse. Run by political appointees, subject to the need to generate pork for elected officials yet having to tell the truth is a discipline that is unrealistically tough.
So a private sector RA is not the answer.
Nor is one owned by a country or collection of countries.
We can't even have a "trusted" RA by choosing people of great personal integrity. A a pimp for bankers I know people who could be trusted to do that.
But you need hundreds of staff at a minimum, more likely thousands and just having a smart and honest leader is massively inadequate for that task.
Have I proved that this is not fixable ?