May 29, 2008
The SEC Going the Wrong Direction on New Ratings Agency Regulations
The SEC is going the wrong direction again. The poor performance of the country's rating agencies in the current structured financial debacle should be no surprise. The agencies have been performing poorly for some time. It just took the current financial crisis to focus our attention on their performance. The SEC is going to fix it, with more detailed regulations of rating agency rating scales, among other things. The competitive market should set scales. The problem is that the SEC has created a protected rating agency market -- ratings are required throughout securities law disclosure regulations and rating agencies are licensed by the SEC (and only a few make the grade). As we have seen with trading market regulations, once the SEC gets into the details of market services there is no stopping it. How bout going the reverse direction? Suspend and rating requirements, let firms choose to hire rating agencies to buttress marketing claims, make rating firms disclose all conflicts about any recommendation, and let the firms develop reputations for credibility in a competitive market.
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