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It's a start
Sep. 18th, 2009 09:32 amSEC Votes on Measures to Further Strengthen Oversight of Credit Rating Agencies
Part of the reason we got in to this financial mess is that the crappy mortgage-backed securities that banks churned out were perceived as safe investments, and buyers snatched them up. The reason they looked safe was that the supposedly-independent ratings agencies gave them high marks. Except the ratings agencies didn't have a clue. They were paid very high fees by the banks themselves, and had every reason to give high ratings as a result. (The SEC put out a hair-raising report (pdf) on ratings agency practices during this period.)
Anyhoo, the SEC has now instituted new rules to control ratings agencies, and is proposing more rules. In particular, here are my favorites:
These rules are designed to make that harder. First, the data would have to be made available to all ratings agencies, so an agency would be able to put out a rating even if not paid to do so. If they get into the habit of this - and who knows if they will, but if they do - underwriters have no incentive to shop because the agency will rate the security anyway.
Additionally, the SEC proposes to force disclosure of actual shopping.
The SEC is also proposing rules to make it easier to sue ratings agencies for crappy ratings, and a judge recently ruled that the First Amendment doesn't shield credit ratings agencies from lawsuits for misleading ratings - which is a landmark decision. Until now, ratings agencies depended on an argument of First Amendment protection.
So - it's progress.
Part of the reason we got in to this financial mess is that the crappy mortgage-backed securities that banks churned out were perceived as safe investments, and buyers snatched them up. The reason they looked safe was that the supposedly-independent ratings agencies gave them high marks. Except the ratings agencies didn't have a clue. They were paid very high fees by the banks themselves, and had every reason to give high ratings as a result. (The SEC put out a hair-raising report (pdf) on ratings agency practices during this period.)
Anyhoo, the SEC has now instituted new rules to control ratings agencies, and is proposing more rules. In particular, here are my favorites:
Adopted rules to provide greater information concerning ratings histories - and to enable competing credit rating agencies to offer unsolicited ratings for structured finance products, by granting them access to the necessary underlying data for structured products.Because part of the problem is that underwriters had every incentive to shop around for a ratings agency that would give them the rating they wanted - and pay only that agency. So agencies would be forced to compete with each other for business, and one plane of competition was the rating itself.
Proposed new rules that would require disclosure of information including what a credit rating covers and any material limitations on the scope of the rating and whether any "preliminary ratings" were obtained from other rating agencies - in other words, whether there was "ratings shopping."
These rules are designed to make that harder. First, the data would have to be made available to all ratings agencies, so an agency would be able to put out a rating even if not paid to do so. If they get into the habit of this - and who knows if they will, but if they do - underwriters have no incentive to shop because the agency will rate the security anyway.
Additionally, the SEC proposes to force disclosure of actual shopping.
The SEC is also proposing rules to make it easier to sue ratings agencies for crappy ratings, and a judge recently ruled that the First Amendment doesn't shield credit ratings agencies from lawsuits for misleading ratings - which is a landmark decision. Until now, ratings agencies depended on an argument of First Amendment protection.
So - it's progress.
