TheBigShort is now a film, 7+ years after the 2007-2008 subprime fiasco, and we still haven't fixed our ratings agencies ( S&P, Moody's, Fitch ).

Even with the post-crisis increase in regulation ( subtitle C of Dodd-Frank et al. ), the incentives they face still haven't changed. Companies can still play them off each other, threatening to take their business to another agency. Their regulator could yet again be harrassed into quiescence by Congress. And they still face no financial penalties for inappropriate ratings.

There seem to only be two ways to fix them: 1) turn them into insurance companies, or 2) get rid of them. Given the political climate, only the first option seems viable.

As insurance companies, they would sell a put for every instrument they rate. If they rate a 100 million USD bond for General Electric, they would sell GE a put on that bond, promising to pay out if they have mis-judged its value.

The US has ~30 T USD of debt that needs to be rated. So each of three ratings agencies would need to cover ~10 T USD, which they could do with 100 B of equity ( 100-to-1 leverage ). Simultaneously, other insurance companies could create ratings agencies; thereby allowing agencies to specialize while also reducing the need for leverage.

The 2nd option would be for the Federal Reserve to start rating financial products. As the lender of last resort, it needs to be able to quickly value products that some bank wants to pledge as collateral for a rescue loan. As the range of products have exploded beyond mere debt, rating products would give the Fed a first look at any product and allow them to provide risk guidance.

It seems unlikely that Congress would pass anything that gave the Fed even more power, so the first option seems like the only real step towards fixing our ratings agencies.