This is the Cato Daily Podcast for Thursday, January 13, 2010.

I'm Caleb Brown.

Credit ratings, the assignment of letter grades to debt and stock issued by private firms and governments played a key role in the financial crisis.

But why? Mark Calabria, director of financial regulation studies at the Cato Institute,

says the raiding agencies have long been nothing more than a government

cartel.

Well, for well over a hundred years, created raiding agencies have been what we call a

gatekeeper in terms of the ability of investors to hold certain assets.

Now they hold a lot, they hold a variety of roles depending on the entity.

For instance, bank capital standards are set

based on ratings. You get the better the rating, the less capital you hold against it. A lot of

large institutional investors, whether it's pension funds, money market mutual funds,

many of these entities are restricted bylaw from only holding investment grade rating.

So it really is the case that the rating agencies kind of get to decide who gets to hold

what for many of the largest investors in our economy.

And so for it to be investment grade, someone of course has to decide that it's investment grade and of course you can't

decide that yourself as the investor you know this outside agency the credit

radians just have to do so now in the mid-70s there was a concern that you

know investors would just decide well you, I'll just hire whoever to tell me what I have is investment grade.

So there's SEC, Securities and Exchange Commission, set up a process where they could essentially try to prevent in their mind a race to the bottom where

rating agencies were simply just for sale.

And so at that point up until the 70s it was essentially the investor that paid for the

...