Raters Moody's, S&P Draw SEC Scrutiny

bigdog posted on 06/20/11 at 10:12 AM

Finally! The SEC is taking a closer look at the credit-rating agencies and their particularly nefarious role in the subprime mortgage crisis. The WSJ's Jean Englesham and Jeannette Neumann cite lawmakers who called the rating agencies "key enablers" in the mortgage securities wave that is still sending shockwaves through our economy. 

Just like Goldman Sachs, it's possible that these agencies won't face the long-term retribution they may deserve, but this feels like a step in the right direction. I must confess I was amazed to read that the agencies scored a legal win in the U.S. Court of Appeals recently. The argument's gist: the ratings issued by these agencies were "merely opinions" protected under the First Amendment. That's a stretch, wouldn't you say?

I wonder when regulators will address what seems to me to be a key conflict of interest: namely, the ratings agencies are paid for their services by the companies they rate, or the investment bankers representing those companies in various securitization and M&A transactions. How can you sternly reprimand a paying client with a bad rating, if that's what's deserved? If the financial system continues to include independent rating agencies, it seems like the "independent" part of that description bears closer examination. 
Do you folks think the ratings agencies will emerge from the crisis unscathed? What reforms strike you as both necessarily and practically viable?

[image: FAIL by amboo who? on Flickr]


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Posted by bigdog on 06/20/11 at 10:12 AM


FSUnewb posted June 20, 2011 (01:50PM)

State rating agencies, that is the only answer.  The FEDERAL RESERVE already does this sort of thing with the banks, so just do it with corpos, and exotic financial instruments.  When I worked in the food industry the company I was at hired private inspectors to come and warn them about stuff that the state inspectors might find.

(INB4 the federal reserve is a private corpo)

incubus posted June 21, 2011 (03:20PM)

COMPLETE and full corporate transparency for the underlying variables ratings agencies use on any equity or derivative publicly traded, so the public can assess on their own.

I.E. if the big banks had fully disclosed that CDO's consisted of such a high percentage of liar loans, they'd never have been able to pawn that garbage as "triple A".

As for the SEC, I say it's just going through the motions, a slap on the wrist to create the public appearance of exacting punitive measures.

Meanwhile, Moody's and S&P has threatened to downgrade the U.S. - I'm not debating that the U.S. doesn't deserve a downgrade, but to make the argument that S&P lied and rated liar loans "triple A" for a price....I find myself questioning what the fee is for downgrading or upgrading whole countries.

I think ratings co's have no use, the SEC would be better served to mandate precise transparency and public information to everyone...we wouldn't need ratings companies in that case.

FSUnewb posted June 21, 2011 (07:22PM)

I AGREE WITH YOU INCUBUS, and I take back my original comment

Meanwhile at yahoo....

bigdog posted June 23, 2011 (10:06AM)

It's an intriguing question, isn't it? This is a topic I am always striving to understand better, and your comments suggest some interesting follow-up reading. Thanks!

Incubus, just to play devil's advocate for a minute: I agree a totally transparent system would be ideal - all the same info provided to the raters made public in a perfect world, where experts and "amateurs" (like us) could collaborate openly or work privately to derive their own opinions of each offering. I still think there is value is a standardized rating system that every investor can reasonably understand. The A, B, C rating system does have the virtue of crisp succinctness, even if it's also been used to cover a myriad of flaws. Who could play that standardization/simplification role in a new transparent reality?

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