EVERYBODY’S looking for somebody to blame for the drama in the credit markets. Here’s a promising villain: Chester Floyd Carlson, a fabulously wealthy Wall Street fat cat whose business helped undermine the independence of the major credit-rating agencies and enabled the massive violation of intellectual-property laws. Never heard of him? He’s been dead since 1968, but his invention-photocopying-made him a rich man, built Xerox, and incidentally changed the way bond-rating agencies do business.
Before the 1970s, ratings agencies charged investors for access to information about the creditworthiness of debt issuers. If an investment house was thinking about picking up $10 million worth of XYZ Corp. paper, it would pay a fee to Moody’s or Standard & Poor’s in exchange for detailed information about the finances of XYZ Corp. The incentive structure was good: Ratings agencies depended on their reputation for providing accurate, reliable, unbiased information, and their clients, who were putting their own money at risk, had an incentive to demand appropriate caution.
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