SEC Bans Wrong Ratings Agency

Throw back the little ones
And pan fry the big ones
Use tact, poise and reason
And gently squeeze them

-Steely Dan, Throw back the Little Ones

 

The WSJ is reporting that the Securities and Exchange Commission has suspended small ratings firm Egan-Jones from issuing any “official ratings” on bonds issued by countries, U.S. states, or local governments. They also were suspended from rating securities backed by mortgages. The ban will last the next 18 months.

The basis of the regulatory punishment was negotiated agreement between the SEC and  Egan-Jones regarding the filing of “inaccurate documents with the regulator in 2008,” mislead investors about their expertise, and violating conflict-of-interest provisions.

No word on when similar conflict of interest charges are coming for Standard & Poor’s Ratings Services or  Moody’s Investors Service for similar misleading, conflicted and otherwise compromised ratings.

The major credit rating agencies were the prime enablers of the credit crisis. They put Triple-AAA ratings on securitized sub-prime mortgage bundles, primarily because they were paid by the underwriters to do so. But for those actions, much of the securitized junk would not have been able to be purchased by the many bond funds, pensions and other large institutional investors mandated to buy only Investment grade paper. (The bond markets eventually figured this out and has learned to ignore the ratings agencies commentary asconflicted and corrupt). Thus, what should have been a tiny,  high risk corner of the mortgage market instead became an enormous, A-rated, mainstream asset class for yield hungry fixed income managers. This is why S&P and Moody’s are thus amongst the prime causes of the financial crisis of 2008-09.

It is a damned shame the SEC has to to figure this out and act on it …

This piece is cross-posted from The Big Picture with permission.

4 Responses to "SEC Bans Wrong Ratings Agency"

  1. terry   January 24, 2013 at 9:27 am

    The SEC will only strike out at those who will not play their game. Where the hell were they when you needed them. What a joke.__

  2. John Tepper Marlin   January 29, 2013 at 5:45 am

    Mary Jo White could fix this. At Debevoise & Plimpton she kept a lot of Wall Street "Untouchables" out of jail. John Cassidy of the New Yorker blogs that the SEC is less bad than Justice and thinks Justice would have been a better place for her. Why not let her spruce up the SEC first and then go on to Justice?

  3. terry   January 29, 2013 at 6:58 am

    If the public really belives the ratings of the agencies or in a fico score they deserve every thing they get. You should bypass all of that bull.

  4. evodevo   January 29, 2013 at 7:25 am

    Under the current regime, they don't WANT to recognize the culpability of the big ratings agencies, any more than they want to prosecute the banksters. Lalalalala I can't hear you……