Commentary

Regulation of the Rating Agencies

What to do with credit rating agencies… it’s a big question. One that will be dealt with as a part of regulation overhaul reform in September. The administration wants to add more transparency to the system and eliminate conflicts of interest. The GOP wants to remove legal dependency on the rating agencies. Others have called for breaking up the oligopoly or punishing the firms some how for giving mortgage-backed securities high ratings and the same to agencies riddled with toxic debt. But others want the government to come down hard on the agencies by defining how they measure firms. This would be a problem.

Assistant Treasury secretary for Financial Institutions, Michael Barr testified to the Senate Banking Committee on August 5, before the Senate went on break, that, “The government should not be in the business of regulating or evaluating the methodologies themselves, or the performance of ratings. To do so would put the government in the position of validating private sector actors and would likely exacerbate over-reliance on ratings.” And he is right that the government should keep its hands off.

But there is an additional problem. Darrell Delamaide writes for FinReg21, “people rely on these ratings so much now because the SEC has designated a limited number of rating agencies as Nationally Recognized Statistical Ratings Organizations since 1975. A number of laws and SEC rules restrict investments of regulated entities like mutual funds and pension funds to those with a certain rating from these NRSROs.” The government can not simply keep its hands off, it must removed language in the law the connects public interests to rating oligopoly.