The concept of a free market rewarding good behavior and punishing bad has taken a beating in the media lately, but there’s been far less discussion about the failures of various government regulators to protect consumers from harm. A 68-year-old retired lawyer in California is suing the three biggest credit rating agencies – Standard & Poor’s, Moody’s and Fitch – for the loss of a $40,000 investment in Lehman Brothers, according to Bloomberg.com. On Sept. 15, 2008, the day Lehman filed for bankruptcy, all three rated Lehman’s as a high-quality, low-risk investment. They were all spectacularly wrong. Yet the Security and Exchange Commission (SEC), which regulates these credit rating agencies, still forces private banks and money market fund managers to rely on their now highly dubious ratings.

The three rating agencies control 98 percent of the debt market in what American Enterprise Institute resident fellow Alex Pollock calls “an SEC-created cartel.” After being paid lucrative fees by companies they rated, they were totally blind-sided when some of the companies imploded. In July 2007 – more than a year before Lehman’s and Merrill Lynch went belly-up – credit default-swap traders had already tagged them as junk, Bloomberg reported, even without the insider information credit rating agencies are privy to. Yet these agencies are now monitoring $450 billion worth of taxpayer-backed bonds.