One of the fundamental flaws revealed by the financial crisis is that the U.S. government lacks the tools to monitor and regulate financial institutions and markets effectively. The most significant weakness is not a lack of legal authorities; it is the absence of necessary data and analytical capability. This cardinal lapse has been largely overlooked until now because critical components of effective regulation were often "outsourced."

Some of that outsourcing enabled the creation of the toxic assets that triggered this crisis. When issued, these toxic assets were rated triple-A or double-A by private rating agencies. Rating these securities and advising issuers on how to qualify for the desired ratings was a large and profitable business for the rating agencies. These ratings received the blessing of financial regulators and made it easy for investment and commercial banks to sell many ultimately troubled assets to highly regulated financial firms (such as insured depositories, insurance companies, pension funds, Federal Home Loan banks, Fannie Mae and Freddie Mac).

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.