Criticism against the rating agencies has been building ever since the Asian currency crisis. It's time SEC reins.

Credit rating agencies are indeed the high priests of global finance. Their ratings make or mar the prospects of debt issues by corporations. Their sovereign ratings determine the investment attractiveness of countries. The finance folklore also has tales of corporations, who, despite possessing better rating than their sovereigns, did suffer because their sovereign ratings became ceilings. Market participants decide specific level of risk exposure based on their ratings. Relying on their credibility, regulators have inscribed these ratings in the regulations. Their sheer clout to influence, coupled with other things, has dragged them into a vortex of criticism- about their abusive competitive practices, conflict of interest, inability to predict (or at least warn) the market disasters. The securities market super cop SEC, too, is not spared from criticism for not responding to remedy the situation, for it is the SEC which endowed the handful of rating agencies with the Nationally Recognized Statistical Rating Organizations (NRSRO) status, which transformed them into monarchs of rating markets.

While the concerns of conflicts of interest inherent in their design have always existed, it is the occurrence of systemic financial disasters as well as the corporate crises, which placed the rating agencies amidst the thick of criticism. For instance, in the Enron fiasco, the credit rating agencies maintained an investment grade for the company, till five days before the company filed for bankruptcy. Similarly, in the context of the Asian Currency Crisis, the rating agencies were criticized for further intensifying the impact of crisis and facilitating the contagion effect spread to other countries, as the rating agencies were reactive in rating the South East Asian countries rather than being proactive.

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