Rating agency regulation eludes criticism

There has been tremendous blame levied on the finance industry for buying up collateralized debt obligations.  And this makes intuitive sense since we ought to expect them to exercise better personal judgment.  The little known fact is that their personal judgment has been largely crowded out by the SEC and replaced by its own list of approved judges.

In 1975 the SEC began requiring the use of credit rating agencies that only the SEC could approve.  At the time, the requirements for using these agencies were limited in scope, but in the past 30 years this has grown in scope to the point where only a handful of companies are the de facto judge and jury for financial worthiness.  In effect the SEC has crowded out independent judgement by sanctioning these rating agencies.

You can learn more about this regulation at from the SEC itself, the rating agency article on Wikipedia and a recent Wall Street journal op-ed.

It is amazing the SEC has faced so little public criticism for its role in this debacle as well as the Bernie Madoff scandal where it completely failed to protect investors.  It is about time we stop pretending the SEC protects us and start reinstituting private credit rating agencies with full latitude to find and prevent such meltdowns.

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