Vol. III - Penn State Abington

the current financial crisis. Just four days before Enron’s bankruptcy, these agencies hurried to
down rate it, which greatly pricked up the volatility of the market (U.S. Securities and Exchange
Commission, 2002).
Credit rating agencies’ behavior aroused controversy over their credibility, and brought in
the Rating Agency Act in September 2006. However, the Commission did not vote to apply
these rules to the NRSRO until June 18th, 2007, and they became effective on July 26th, 2007,
when the subprime mortgage problem had already emerged (U.S. Securities and Exchange
Commission, 2008:4).
2) Facilitating Monopoly
By the 1970s, the credit rating industry had gradually become dominated by the big three.
They had an overwhelming voice to affect investors’ investments in financial market, although
their rating was still comparatively reliable.
Meanwhile, the economic recession of the 1970s triggered a debt crisis, and regulators
tried to control investments’ risk through credit rating reports. In 1975, U.S. security exchange
commission declared minimum criteria on agents/dealers’ clearance (Securities Exchange Act,
1934:Rule 15c3-1). For the first time, the rating results of the National Recognized Statistical
Rating Organization (NRSRO) were considered as part of the legal system of federal security
supervision. This rule stated that when calculating net capital, agents/dealers have to discount a
certain percentage of it from the market value of the securities they hold, in order to mitigate the
effect of price fluctuation in market. But if these securities are rated as the first two grades of the
highest credit rating by at least two NRSRO, the discount on their market value can be largely
reduced (Securities Exchange Act, 1934:Rule 15c3-1).
Afterwards, more rules related to NRSRO credit rating were brought in. In 1982, the SEC
revised the information disclosure rule. It confirmed that if unconvertible bonds or unconvertible
limited securities are rated as investible securities by at least one NRSRO, they will be able to
use the S-3 form, the simplest and least informative way to release their business information. In
1996, the SEC stipulated that currency market funds can only invest in high-quality short-term
financial tools, using an investment portfolio based on NRSRO rating results. Even the U.S.
Department of Education required new financial responsibility from organizations that sought to
join the student loan program, by submitting to NRSRO ratings. In a report submitted to US
senators by the SEC, at least eight federal laws, 47 Federal regulations or rules and more than
100 local laws at that time used NRSRO rating results as regulation criterion (U.S. Securities and
Exchange Commission, 2002).
In this way, government’s reliance on NRSRO greatly magnified the already strong voice
of these CRAs. Investors become increasingly credulous towards the rating results. Security
issuers now had to apply for a rating from NRSRO to benefit from good ratings. The voluntary
credit rating system had gradually become an established process, which further weakened the
reputation capital mechanism.
What was worse was the lack of objective or clear statements on NRSRO licensing
conditions and procedures for a long time. From 1975 to 2003, there were few credit rating
agencies licensed as NRSRO, apart from the big three. Even though there were some, they were
taken over by the big three after all (Yu, 2008). So the NRSRO greatly strengthened the current
monopoly situation in the credit rating market. And these big three gradually changed from
private business organizations into some kind of regulators. Although these agencies were
THE DIALECTICS ▲ 2009
www.abington.psu.edu/dialectics
34