Frank Partnoy has a smart paper from 2006 on the role of credit agencies in capital markets. They are under increasing regulatory pressure right now, what with a sense in some quarters that the agencies have a modicum of blame for the subprime problems.
My take: It’s government that got us into this fix. There is an issuing requirement that bonds/debt/whatever have an attached credit rating from a Nationally Recognized Statistical Rating Organization (NRSRO), which is awfully nice of the government if you’re in the oligopolistic credit rating business. After all, no-one says new equity issues must have analyst ratings attached from your choice of Goldman, Merrill, or Citi –what makes debt so damn special?
Go read Partnoy on the issue.