If the SEC couldn't "fix" the auditing business in 31 years, why believe it can "fix" the rating agencies? The SEC should end the "NRSRO" designation. Anyone who wants to rate, rate. I have another idea: a rating agency accepting a fee from an issuer to rate a security assumes underwriter's liability. Further, the rating agency should be denied any "privity" defense with regard to holders of the security. Then it's: sue away and let the plaintiffs' bar discipline the agencies. I wonder how quickly the rating agencies will tell underwriters they can't afford to give unduly high ratings. I think the rating agencies would be afraid to rate securities "that lack historically relevant data" if they knew they would get sued over their ratings. See my 6 October post.
"So how can we increase transparency in a complex market where everyone involved profits by keeping the investor in the dark? One way would be 'a large lawsuit by a well-capitalized institution.' says Sylvain Raynes [SR], a principal at R&R Consulting, a structured valuation boutique in New York. Another way would be to utilize 'cybernetics, or the theory of feedback control, in both primary and secondary markets,' he says. (Here I thought the structures were incomprehensible. Now I find out that cybernetics is the key to enlightenment.) ... For our purposes here, the issue is the 'need to introduce secondary market monitoring in a meaningful way,' Raynes says. The primary market needs to develop 'valuation standards,' which 'could have avoided 90 percent of the problems,' he says. 'It is possible to know a priori that a deal does not work, that the amount of securities in the transaction is too high'," Caroline Baum at http://www.bloomberg.com/, 24 August.
I agree in part with SR, a "large lawsuit by a well-capitalized institution" would help. Still better might be an indictment of a rating agency and an underwriter under say, 18 USC 225, continuing financial crimes enterprise. Mike Garcia (MG), wake up! You might become New York State's next governor! Needing "secondary market monitoring" may be SR's way of saying our old friend is back, the classical agency problem. I can't see how developing "valuation standards ... could have avoided 90 percent of the problem". If SR could explain this to me I would appreciate it. Having been a CPA for many years, I've concluded in many instances, "standards" just protect the "professional" from malpractice lawsuits. Nor do I understand the phrase "the amount of securities in the transaction is too high". Too high for what?
18 USC 225 requires "a series of violations under section ... 1014 ... of this title". 18 USC 1014 states, "Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of ... any institution the accounts of which are insured by the Federal Deposit Insurance Corporation [FDIC], the Office of Thrift Supervision, ... the [FDIC], ... upon any application, advance, discount, purchase, purchase agreement, repurchse agreement, commitment, or loan, or any change or extension of the same, by renewal, deferment of action or otherwise, or the acceptance, release, or substitution of security therefor, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both". Good authority indicates the rating agencies did this, i.e., Ann Rutledge told us; see my 27 December post. What makes 18 USC 1014 so juicy, is: willfull overvalution of almost anything to influence a financial institution is a felony. I wonder if Hank Paulson's Treasury Department attorneys knew this before he tried to float MLEC? Under any circumstances, MG, hop on this. Your governorship awaits.