Let’s Grade Wall Street Like Colleges

Is Harvard really the best?

It turns out that depends on who you ask—and what you ask. As students across America return to campus for the new school year, new editions of three prominent college guides variously rank Harvard at No. 1, No. 5, and No. 11. Therein lies a timely lesson for our system of credit ratings.

Some students know from their earliest days they want to go to Harvard, while others may want to follow mom or dad to East Carolina or Purdue. Many more rely on the annual college guides to help them make one of the most important financial decisions in their lives—in much the same way an investor might look to Moody’s to tell them about the reliability of a corporate bond. The question with both is just how reliable those ratings are.

When the housing bubble popped, our financial institutions learned—the hard way—that the mortgage-backed securities on their balance sheets did not merit the AAA-grades the credit ratings agencies had assigned them. Similar complaints have long been advanced about the trustworthiness of college guides. As the dominant player, U.S. News & World Report’s annual America’s Best Colleges guide has borne the brunt of this criticism.

In public, college presidents, deans, and spokesmen pooh-pooh the U.S. News rankings. In private, however, many do what they can to boost their schools up the rankings ladder. One area open to manipulation has to do with the “peer assessment” category that accounts for a quarter of the U.S. News ranking.

Earlier this year, Inside Higher Ed reported on a charmingly frank presentation by a Clemson University official who admitted her school’s officials use the peer assessment to rate “all programs other than Clemson below average.” The university denied the charge. But further reporting revealed that Clemson President James Barker had given his only “strong” rating to his own school, while giving lower grades to every other college in the land.

The revelations have been an embarrassment for Clemson. Still, the woman who set off the firestorm was surely right when she said, “I’m confident my president is not the only one who does that.” Other schools, after all, have found themselves in the news for manipulating the way they report to U.S. News everything from their average SAT scores and alumni giving to per pupil spending and class profiles.

So if the U.S. News report is so flawed, where’s the lesson for Wall Street? The answer lies in the new competition the U.S. News guide has spawned. In the last few years, the Washington Monthly and Forbes have each offered guides of their own. They are joined by the American Council of Trustees and Alumni, which measures colleges by whether they require seven core subjects the authors deem essential for a solid liberal arts education. There’s even the conservative Intercollegiate Studies Institute’s “Choosing the Right College,” which offers advice about the best professors and courses to seek out on campuses.

Different measures, of course, lead to different results. The latest U.S. News guide has Harvard and Princeton tied for No. 1, followed by Yale. Over at the Washington Monthly, by contrast—where editors measure colleges by how well they do at promoting social mobility, national service and research—Harvard falls to No. 11. And the top three slots are taken by public universities in the University of California system: UC Berkeley, UC San Diego and UCLA.

Then there’s Forbes, which just ranked West Point as “America’s Best College.” The Forbes ratings include student satisfaction with courses, post-graduate employment success (including salary data and entries in Who’s Who), the likelihood of graduation within four years, and the average level of debt graduates are stuck with.

Which guide is best at picking the best? The answer is that no single measurement or guide can tell everyone everything. The more measures students and parents have, the fuller the picture before them, and the better equipped they are to make a smart decision. Because the federal government is not in the business of certifying particular college guides, moreover, they compete by persuading students and parents to buy them on the quality and relevance of their findings.

At a time when the Securities and Exchange Commission is looking for ways to improve the flawed credit ratings that contributed so much to our financial crisis, it might do well to stop anointing particular credit rating agencies. Forcing these firms to compete for customers the way the college guides do would give us better ratings—and fewer investors lulled into the complacency that comes from thinking Uncle Sam has done the due diligence. At least when it comes to ratings, the Groves of Academe have a thing or two to teach our captains of finance about competition.