Rating Agencies

The SEC is finally, finally, tackling the problem of rating agencies.  They are very, very late to the party on the matter.  Moreover, the SEC has found that its running up against Reg. FD and insider trading rule problems in the solutions in wants to propose -- that agencies demand more information when they rate securities.  I was introduced to the ratings agency mess as a consultant on a law suit that ended in a bizarre result.  A local municipality refused to pay all the agencies for ratings -- it would pay only one.  One of the other rating agencies then rated the bonds anyway and hammered them -- resulting in the municipality having to pay higher interest rates.  When the municipality sued for, in essence, economic extortion, the judge dismissed the suit on First Amendment grounds -- free speech!!  Extortion is free speech??  Unbelievable.  The real problem hear is one the SEC will not address -- the SEC has created a oligopoly in the industry.  The SEC does two things -- it requires ratings in many of its rules and it licenses the rating agencies.  Since few rating agencies are licensed the rating agencies that are can demand high prices and do shoddy work.  The SEC is throw this open to market forces by no longer requiring ratings (only the disclosure of any and all ratings that do exist) and by licensing many more rating agencies (a simple test and a character qualification should do it).  Let investors choose the rating agencies they trust and ask firms to us.