SEC keeps credit ratings game rigged in the US

The SEC brought a civil case against a tiny, iconoclastic ratings agency called Egan-Jones accusing it of filling out forms wrong. The allegations seem especially paltry when compared with the disastrous performance of the ratings agencies that matter—Moody’s and S&P

The Securities and Exchange Commission (SEC) seems to think that it has done a much better job of investigating financial crisis wrongdoing than the Justice Department. And it’s true.

But it’s like being proud that you're the ‘Dumb’ of “Dumb and Dumber.”

A case the commission filed last week epitomizes a lot of what’s wrong with the agency, even under the supposed overhaul by its chairwoman, Mary L Schapiro.

The agency brought a civil case against a tiny, iconoclastic ratings agency called Egan-Jones, run by the outspoken Sean Egan, accusing it of, well, essentially filling out forms wrong.

Before the SEC charges, Egan-Jones was best known for two things: having made some bold calls about shaky credit prospects and having a business model that was different than that of the big boys—Moody's Investors Service, Standard & Poor’s and Fitch. Mr Egan’s outfit gets paid by the users of his ratings; the oligopoly gets paid by the issuers whose debt is going to be rated.

You don’t need to be a hedge fund quant to see the conflict of interest: the more ratings, the more profits to the ratings agencies, so the temptation is to be extra lenient. And, boy, were they.

Mr Egan wasn’t shy about pointing this out, often through media appearances. To be honest, one wondered how much was showmanship and how much was deep research.

But the world needs his brand of punditry, especially on Wall Street, where the uncorrupted are too afraid to speak out. Mr Egan has been prescient on some important calls about declining credit prospects, ahead of both the European financial crisis and the American mortgage and structured finance bubble before that.

The SEC’s case against Mr Egan and his firm concerns a filing made in 2008 seeking special designation to be a “nationally recognized statistical ratings organization.” This status confers some rights and special privileges under securities laws, and it’s one of the main competitive advantages the credit ratings trinity has.

The agency makes a variety of allegations. For one, Egan-Jones represented in its application that it had 150 ratings on asset-backed securities and 50 ratings on governments, when it hadn’t issued any at the time, the SEC says. To the guillotine! (Egan-Jones responds that it was using a different counting method.)

Some allegations are more serious, but only slightly. The agency contends that two Egan-Jones employees had a role in rating issuers while owning securities in those issuers. The firm says these employees had long-standing investments and that it actually brought these violations to the attention of the SEC.
All told, the allegations seem especially paltry when compared with the disastrous performance of the ratings agencies that matter—Moody’s and S&P. Egan-Jones’ ratings didn’t cripple the global economy. Mr Egan’s business model is far less prone to compromise and corruption. The inescapable conclusion is that the SEC is letting Moody’s and S&P officials walk free while pursuing Mr Egan on minor technicalities.

This is your SEC, folks. It courageously assails tiny firms, and at the pace of a three-toed sloth. And when it goes after its prey, it's because it has found a box unchecked, rather than any kind of deep, systemic rot.

Unfortunately, there’s an even worse problem here. The action against Mr Egan gives the appearance, perhaps inadvertently, that the agency is persecuting a longstanding critic of the ratings agencies. That just solidifies the woeful ratings oligopoly we have today.

Now, the SEC doesn’t see it this way, naturally. The agency says that bringing one case doesn’t preclude another. And it’s true that there have been news reports of investigations into the ratings firms regarding actions that led to the financial crisis, including notices that it plans to bring charges over some ratings.

John Nester, a commission spokesman, said the agency stands up to the big boys. “Our record shows beyond dispute that no institution is immune from SEC charges when we find violations of the securities laws,” he said, pointing to, among others, Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America.

Relative to Eric Holder’s Justice Department, that record makes the SEC look like the god Shiva, destroyer of worlds. But the SEC has hardly been aggressive about the ratings agencies. It hasn’t moved against any top executives of any major ratings firm for actions leading to the financial crisis.

In one of its timorous moments, the agency punted on a case involving Moody’s and a questionable rating on a complicated European structured finance product. The SEC determined that it was unclear whether it had jurisdiction because the securities were created and sold in Europe.

Promising leads on other potential wrongdoings by credit rating agencies seemingly go to the SEC to die. A whistle-blower—Eric Kolchinsky, a former Moody’s executive who oversaw the firm’s collateralized debt obligation ratings—claimed that Moody’s inflated ratings on a loan deal called Nine Grade Funding in January 2008 because it had already made a decision that it was going to downgrade the assets that were going into the deal.

Some three years after that allegation was dropped at the door of the SEC, there’s been no action so far on the deal.

Moody’s declined to comment. The SEC does not confirm or deny investigations. Given that the regulator’s bark is worse than its bite, Egan-Jones will probably be able to wriggle out of the agency’s clutches with a settlement and a fine. Mr Egan’s business will be damaged, but he is likely to still have one.

The help that the SEC has given the oligopoly will last, however. Any small company looking at filing for special status will think twice. While they ponder, Moody’s, S&P and Fitch will continue to earn fat profits, and their executives walk free.



Mike Dever

5 years ago

I'm certainly no fan of the credit rating agencies. They are incompetent and borderline criminal with their conflict-of-interest (issuer pays) laden business models. Egan-Jones was the one firm structured differently. Rather than focus on them, the government should focus on the underlying problems inherent in the structure of the 'big three.' It was government regulations that empowered the credit rating agencies by requiring institutions, such as banks, to invest only in debt securities that were rated by one of the agencies. Now they need to fix the mess. Remove those rules and let the market decide whether to use the credit rating agencies or not.

I talk about the failure of the credit rating agencies and government regulations in my book "Jackass Investing." I'm pleased to provide readers with a complimentary link to the two chapters dealing with this (Myth #13: It's Best to Follow Expert Advice and Myth #14: Government Regulations Protect investors):


5 years ago

Welcome to moneylife. I have already subscribed to your news letters.

Dear MDT - Appreciate your efforts. It would be great if you could publish more articles of this kind from around the world.

Public Interest Exclusive
Google Wi-Spy scandal heats up

Google needs to fully explain to Congress and the public what it knew about the collection of data through its Street View program, in a report said that critics are questioning how much Google knew about the rogue engineer supposedly responsible for Google's gathering of massive payloads of data from private Wi-Fi networks.

“Google’s motto has always been ‘Do no evil’. It should also be ‘Do no eavesdropping’,” said Rep Edward J Markey (D-Mass.), senior member of the House Energy and Commerce Committee, according to the Los Angeles Times. “Google needs to fully explain to Congress and the public what it knew about the collection of data through its Street View program.”

Google already faces an ongoing Federal Trade Commission (FTC) anti-trust probe that took on new life last month when it was disclosed that the government had hired a top private attorney to manage to case.

Now Consumer Watchdog, a non-profit advocacy group in California, has filed a Freedom of Information Act Request with the Federal Communications Commission (FCC) seeking all documents related to the Commission’s investigation of the Google “Wi-Spy” scandal. The FCC recently fined Google $25,000 for wilfully obstructing the FCC’s investigation into how Google’s Street View cars gathered “payload data” from private Wi-Fi networks.

“The FCC order gives an overview of what happened and shows that others including a senior manager knew—or should have known—about plans to gather messages from private Wi-Fi networks,” said John M Simpson, Consumer Watchdog’s Privacy Project director. “The order makes it clear that Google stonewalled and was uncooperative.  That’s why the public needs to see all the documents that are related to the case.”

“Google is paying a $25,000 fine for its non-compliance and is trying to portray the FCC order as exonerating the company. That is not the case at all,” said Mr Simpson. “The FCC order shows that substantial questions about the Wi-Spy scandal remain unanswered and that is largely because the engineer responsible for writing the code that gathered payload data invoked his Fifth Amendment right not to testify.”

(Courtsey: R. Hood)
Read the original report here


Osama offered no resistance to US commandos: book

When the moment finally came, Osama bin Laden went out not with a bang but with a whimper. The 54-year-old bin Laden may have grown complacent or tired during his decade on the run; he had no real escape plan, and there was no secret passageway out of his house says a new book

Washington: Al-Qaeda emir Osama bin Laden, who all his life boasted that he would go down fighting and would ask his bodyguards to shoot him if ever he came near Americans, offered no resistance when US commandos cornered him in his Abbottabad hideout a year ago, claims a new book.

"For all his bluster that he would go down fighting and his bodyguards would shoot him if he were ever found by the Americans, when the moment finally came, bin Laden went out not with a bang but with a whimper," wrote Peter Bergen, author of the 'Manhunt: The Ten-Year Search for Bin Laden - from 9/11 to Abbottabad' that hit the bookstores this week, reports PTI.

Mr Bergen, director of New America Foundation- a Washington-based think-tank and national security analyst of the CNN, in his new book provides fresh insight into the last few hours of bin Laden and the successful American operation that killed the most wanted terrorist of the world on 2nd May last year.

"The 54-year-old bin Laden may have grown complacent or tired during his decade on the run; he had no real escape plan, and there was no secret passageway out of his house. Perhaps he expected some kind of warning that never came. Or perhaps he knew that a fire fight inside the enclosed spaces of his house would likely end up killing some of his wives and children," Mr Bergan wrote in his book giving a detailed account of what happened when US commandos entered his safe house.

"On a shelf in his bedroom were the AK-47 and Makarov machine pistol that were bin Laden's constant companions, but he didn't reach for them. Instead, he opened a metal gate, which blocked all access to his room and could be opened only from the inside, and quickly poked his head out to see what the commotion was. He was immediately spotted by the SEALs, who bounded up the next flight of stairs," he wrote.

"At this point, unless bin Laden walked out of his bedroom with his hands up and said, 'I surrender', there was no chance that he would be taken alive. Retreating inside, bin Laden made the fatal error of not locking this gate behind him, allowing the SEALs to run past it into a short hallway. They then turned right into his bedroom," Bergen said.

"Hearing the sounds of strange men rushing into their room, Amal (one of Laden's wife) screamed something in Arabic and threw herself in front of her husband. The first SEAL who charged into the room shoved her aside; concerned she might be wearing a suicide bomb vest. She was then shot in the calf by another of the SEALs and collapsed unconscious onto the simple double mattress she shared with bin Laden," he wrote.

"Bin Laden was offering no resistance when he was dispatched with a 'double tap' of shots to the chest and his left eye. It was a grisly scene: his brains spattered on the ceiling above him and poured out of his eye socket. The floor near the bed was smeared with bin Laden's blood," he said.

President Barack Obama, who along with his national security team were in the Situation Room of the White House quietly said, "We got him, we got him," when he was told the code word 'Geronimo EKIA.'


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