The SEC, which regulates credit rating agencies, pointed out that the issue-pay model has many benefits. It is unique in its transparency compared with the alternatives. It enables ratings to be publicly available and free of charge to all market participants and fosters more efficient debt markets and coverage of emerging companies.
Public disclosure of our ratings to a broad audience of market participants means our opinions are subject to market scrutiny every day from every corner of the capital markets.
Unfortunately, S&P defends its issue-pay model, which was essentially forced on it by regulators. Moreover, S&P gives its implicit approval to the SEC's regulatory powers over it. Can this be because S&P, along with Fitch and Moody's, enjoys a coercive oligopoly courtesy of their unique market position as a government licensed, federally mandated oligarchy?
Or, does S&P avoid criticizing the SEC for fear of regulatory reprisals?
In our mixed economy, one never knows what hidden pressures and incentives are brought to bear on business. One thing is for sure: In a free market, the disastrously wrong ratings issued by the major credit rating agencies in the mid-2000s would have long ago driven them out of business, in favor of more competent competitors.
Related Reading:
S&P Fraud Suit: A Case of the Pot Calling the Kettle Black
The Financial Crisis and the Free Market Cure—by John A. Allison
The Housing Boom and Bust—by Thomas Sowell
ARC's Response to the Financial Crisis—Ayn Rand Institute
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