Warning gentle reader, this is a personal rant. The Securities Exechange Commission has a small power that makes it indirectly manipulate over $3 trillion in debt Securities. This power is vested in them by their declaration to determine who is and who is not an NSRO (National Statistical Ratings Organization).
The NSRO's are the organizations who gave AAA ratings to the instruments known as CDO Collatoralized Debt Obligations. These NSRO's have mis rated businesses and municipal govt's for decades.
The NSRO scam is tantamount to creating a legal monopoly on truth, something still in vogue only in the bureaucracies of North Korea, Cuba and a few other less cheery holiday destinations. The irony of these actions happening via the SEC is strong.
The SEC's act of anointing NSRO's is tantamount to the creation of a ministry of Truth. Imagine if you will that a small group of companies anointed by the government told you which investments you could and could not make. You dear gentle reader might like to seek a second opinion. Unfortunately that second opinion while readily available would not carry the weight and benefits granted by the NSRO's.
Anyone in a democracy wouldn't stand for a government monopoly on truth setting the price on investments and yet that is exactly what the SEC does via its creation of NSRO's. This monopoly on truth is one of the systemic flaws that has lead to the current credit crisis.
The credit crunch of 07-08 is a logical follow on to the credit bubble. The nature of the failure is what is known as a normal accident. Normal accidents, sometimes called systemic accidents occur when the very structure of a complex system leads to its failure. If you are interested in these types of accidents read the book Normal accidents by Charles Perrow.
The global credit market is undergoing a "normal accident". The very structure of limiting debt ratings to a few agencies helped facilitate this. It is a classic case of unintended consequences, whereby a safety mechanism induces a failure. Usually in banking risk arrives in the form of moral hazard, here it showed up in limited opinions and dubious math via a few limited groups.
It seems a bit flawed to limit legally recognized opinions of creditworthiness to an anointed eight firms. One should have multiple opinions and none should be more equal than others. I look forward to industry and academic papers which call for the doing away of the whole NSRO system. My greatest fear is that the SEC anoints a few more firms as NSRO's such as the recent granting given to Egan Jones. Now we have 8 geniuses establishing truth for the world's debt markets.
In my opinion the whole business is rotten and risks greater future problems. Every ministry of truth system has been found to ultimately rest on falsehoods which lead to their collapse. As Karl Popper has indicated correctly, every system ultimately bares the seeds of its own destruction and this holds true for the NSRO's.
There is a need for dissenting voices and the discrediting of the entire NSRO system for the shambles it is. For the sake of the debt markets, please contact your local congressman and ask them to tell the SEC to give it a rest on anointing those debt market geniuses known collectively as our NSRO's. The NSRO system needs to be eliminated for it is fostering the very risk it seeks to mitigate.