Raters Moody's, S&P Draw SEC Scrutiny
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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Don Montanaro does not currently hold any positions in the securities mentioned in this post.