The SEC and the Credit Rating Agencies

In today's lecture, Prof. Grace mentioned how the big three credit ratings; Moody's, Standard and Poor's and Fitch, are in a monopoly and how it is virtually impossible for competition to enter the market. I found this very interesting and I decided to investigate why the SEC would want to prevent more companies from entering into this market.

Connecticut Attorney General, Richard Blumethal, questioned why the big three credit rating agencies were given over $400 billion of the bailout money and why six of their smaller competitors were shut down. This money was intended to restore credit markets and Blumenthal questioned why it was given to the credit rating agencies when they were some of the main contributors to the current economic crisis. They did this, as Prof. Grace said today, by not adjusting their credit ratings appropriately with portfolios that dealt with mortgage-backed securities.

The credit rating agency is a $5billion-a-year industry and Blumenthal describes it as an "Old boys club" of Wall street, a complete monopoly that needs to be broken up. In my opinion these three agencies need to be regulated and double checked. Obviously there is no check-and-balances system in place between the three main agencies and they have a "scratch my back, scratch your back" attitude. Mary Schapiro, the chairman of the SEC suggested to ask congress for more supervision and regulation for the Wall street credit rating agencies. Schapiro, was given this authority in 2006 and also wanted to reduce the industry's dependence in these credit rating agencies.

A good way to bring in a system of checks-and-balances is to create monopolistic economy by bringing in new competition (new credit rating agencies). Know, Prof. Grace also mentioned today that the SEC prevents competition from entering the market. This obviously contradicts my previous statement where I said that SEC wanted to reduce the dependency on these agencies and also to regulate them. I tried to research this statement by Prof. Grace, but I couldn't find anything about how the SEC denies new credit agencies to enter the market.

So please feel free to reply to this post, either supporting or negating my opinion.


Associated Press