End the Gov't.- Created Oligopoly in Credit Analysis

Virtually everyone who has reviewed the causes of the meltdown has concluded that credit ratings were a major factor.

Instead of a free market judging the likelihood that a particular bond will be repaid, regulation by the SEC and Federal Reserve forces market participants to use the government's hand-picked experts at Standard and Poor's, Moody's and Fitch. Since 1975, the SEC has anointed a small group of firms as Nationally Recognized Statistical Rating Organizations (NRSROs), and money market funds and brokerages have no choice but to hold securities rated by them. To this day, the Fed will only accept assets as collateral if they carry high ratings from S&P, Moody's and Fitch.

We aren't urging the Big Three to yank the U.S. Government's AAA rating as a show of independence. But we are suggesting that the SEC and Fed get out of the business of dictating which firms may judge credit risk.

Peter Fisher at Blackrock argues that it's time to abolish the NRSRO designation for entire firms and instead allow individuals to become licensed to do credit analysis, like brokers and equity analysts. Law professor Mr. Partnoy (scheduled to address the SEC today) argues that instead of relying on the failed ratings agencies, regulators should harness the power of the bond and credit default swap markets, which yielded more accurate readings on the default risk of firms like Bear Stearns.

Those ideas deserve debate, but the starting point for reform must be ending the government-created oligopoly in credit analysis.

~WSJ Editorial