What goes on at McGraw-Hill, the mysterious Midtown company that makes New York’s state tests? One answer: The company is not-so-quietly producing a slew of ratings lambasted for being inflated, corrupt, and totally bankrupt.
I don’t mean more state test scores. I mean credit ratings churned out by Standard and Poor’s, the ratings agency that makes up nearly half of the company’s business, according to CNBC.
Yes, that’s the same ratings agency that has been criticized for inflating the value of companies from Enron to Bear Stearns.
One of the biggest criticisms of S&P and agencies like it is that their customers have an inherent interest in being rated highly.
As Thomas Friedman Paul Krugman wrote in a recent column, summing up the conventional wisdom:
It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt — which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages — could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job.
I’m not saying that this is a perfect analogy for the testing industry, which also sells to a customer — state education officials — with a clear stake in looking good. In New York, at least, the customer right now is hell bent on looking bad as long as it means getting the tests more accurate.
But it’s a close enough situation structurally to make me laugh — and wonder if any McGraw-Hill executives are thinking about cross-company lessons.