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Ratings Agencies vs. Democracy

David Callahan

In an op-ed in today's New York Times, Jeffrey Ganns provides the most insightful explanation yet of why S&P downgraded the U.S. credit rating even though there is no evidence that the United States would ever not make good on its debts.

The credit rating agencies are taking advantage of the country’s financial problems to increase their own political power. They want to ensure that regulators do not reduce their autonomy and influence. . . .

The financial crisis jeopardized the agencies’ privileged position. Politicians and pundits accused them of being asleep at the wheel, if not complicit with issuers, in camouflaging risks and misleading investors during the run-up to the subprime mortgage crisis. The Dodd-Frank Wall Street reform law, enacted a year ago but not fully implemented yet, threatened to introduce unprecedented oversight and regulation. 

The law called for exposing rating agencies to civil liability in securities lawsuits if their ratings were inaccurate. It also challenged the oligopoly’s dominance by calling for the Securities and Exchange Commission to explore the feasibility of having an independent organization select rating agencies for asset-backed securities, instead of having the bond issuers select and pay the agencies, as they now do.

But the rating agencies struck back, first through civil disobedience. To evade potential liability, they threatened to freeze the markets for asset-backed securities by refusing to allow their ratings to be quoted in S.E.C. filings. The S.E.C. quickly caved and suspended the rule. Meanwhile, the rating agencies have begun a guerrilla campaign of behind-the-scenes lobbying to weaken the commission’s efforts to carry out other parts of Dodd-Frank.  

The S.& P. downgrade has elevated this simmering standoff to an overt clash. Politicians will be tempted to wave a white flag by granting the agencies a pass from tough regulation in exchange for the agencies’ not downgrading federal debt further. While that approach may give the United States breathing room in the short run, the government should not give in to such extortion.  

If this is all true -- and it certainly sounds right to me -- it is yet more evidence of how powerful financial players have hijacked public policy. And it is one more reminder why the fight to successfully implement Dodd-Frank in the face of massive resistance by the finance industry and its allies on Congress is so important.