SEC - Regulating the Obvious
We need to invent a new word in the English language that describes an action so absurdly overdue that once finally undertaken it immediately becomes a totem of absurdity.
We could have used this word when the FAA (now TSA) made the decision to ban box cutters and other sharp weapons from carry-on luggage only after 9/11 brought terrorism to the forefront. We could have used this word when our Federal government decided to require testing of Chinese toys for lead paint only after children across the country were poisoned.
Just yesterday, we could have employed that newly coined word to describe the overdue move by the SEC to adopt rules designed to reduce conflicts of interest that are now common in the credit-rating industry.
Faced with the devastating collapse of the mortgage market, and a massive credit crunch, Federal regulators finally concluded that there is something wrong with the way the $5-billion-a-year credit-rating industry governs itself.
Rating agencies play a pivotal role for investors - an opinion issued by ratings agencies signals the creditworthiness of public companies and their securities. What credit agencies say can dramatically affect a company's share price, or a security's yield. These opinions are touted to investors as an ostensibly objective opinion on the risk of investing in particular securities.
The three largest players -- Standard & Poor's, Moody's and Fitch - clocked a lot of ducets offering their ratings. It is a $5 billion industry. The public now knows what industry insiders have long discussed - that agencies were spewing ratings on sub-prime mortgages and related securities that had as much in common with reality as a Salvador Dali-inspired nightmare.
Of course we all know the fallout: the big three were forced to recast their ratings and downgrade thousands of securities backed by mortgages, an action that many say led to our current economic meltdown.
The new regulations are a good start. One regulation tightens up conflict-of-interest rules, which prohibit the rating agencies from giving investment banks exclusive counsel of how to package securities. Another limits the value of gifts from investment banks to rating agency staff. It also requires that the agencies disclose the reasons they upgraded or downgraded a security, amid other disclosure requirements.
The new regulations did fall well short in many ways. Where are the tighter rules to suspend the licenses of those who acted improperly, and rules to hold the agencies liable for their published opinions? Not to mention a forced separation of rating agency credit analysts and employees responsible for generating revenue.
Yes, these rules could make us safer when it comes to the veracity of rating agencies, but one must wonder why this has taken so long and if they go far enough.