Although the focus of the public and the administration is on deregulating the rating agencies questions are being raised about how effective it will be in preventing a rerun of the financial crisis and consequently the increase of foreclosure houses. But many pundits are of the opinion that more players in the rating field will allow healthy competition to the benefit of those investing.

There are big questions being posed about the three sole rating agencies in the field – Moody’s, Fitch and Standard & Poor. They gave triple A ratings to risky bonds and when these began to hiccup the entire financial system of the country crumbled. Could it be that these rating agencies were handsomely paid by the bond issuers to attract investors? Facts seem to point that way.

Lawrence J. White of New York University has been arguing for deregulation. In 1975 the government set up NRSRO beginning with the above mentioned three as the initial members. Thus a triple A rating from any one of them was recognized as a nationally approved nod. Right now NRSRO has ten members but it is the three mega ones that dominate the scene and their nod seems to be the equivalent to the government’s stamp of okay.

White proposes that the SEC should do away with the barriers that have been placed on other agencies entering this rating field. Competition will in the long run better see to the interest of the investors and the economy.

The bond market is basically comprised of institutional markets and this means market forces (provided information is correct) will operate well. It will not be necessary for the detailed regulation that SEC has introduced, to be in force.

But if the players on the stage are the same banks as well as the same rating agencies can any basic change take place? The recent happening should open one’s eyes to what happens when the market tries to self regulate itself. This lesson should not be so quickly forgotten.

White argues for anti-rgulation. If further regulation is introduced it will put extra financial pressure on firms to become these agencies. More involvment would be required from SEC to put in more work. There will be little incentive for innovation. But it has to be borne in mind that these innovations like the mortgage backed securities that brought down the financial system on its knees. At the root were these greedy agencies and sleeping SEC.

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