Tuesday, July 29, 2008
31 More Years?-2
"Credit-rating firms put profits ahead of quality controls as they sought to keep up with the surging growth of mortgage-related debt products in recent years, a [SEC] report released Tuesday showed. ... The 10-month examination uncovered poor disclosure practices, a lack of policies and procedures guiding the analysis of mortgage-related debt, and insufficient attention paid to managing conflicts of interests, the report said. The review also found that analysts performing the ratings often were cognizant of the fees the firms would make and there 'does not appear to be any internal effort to shield the analysts ' from discussions about fees. ... At least one firm struggled to maintain enough staff to ensure high-quality ratings. Two analysts at one rating firm were concerned about whether they should rate a deal, according to the report, which declined to identify which firms or individuals. In one exchange, dated April 5, 2007, an analyst said the ratings model didn't capture 'half' of the deal's risk but that 'it could be structured by cows and we would rate it,' according to the report. ... In an internal email dated Dec. 15, 2006, one manager wrote to another that the rating firms continue to create an 'even bigger monster--the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters.' ... Mr. Cox, who wouldn't comment on enforcement investigations, said one could 'rest assured' that 'when the SEC finds evidence of wrongdoing' the matter is reviewed by the agency's enforcement division. ... Joshua Rosner, an analyst at Graham Fisher & Co., a New York research boutique, said it was 'outrageous' that the SEC didn't disclose which rating firms had been found deficient on which counts. 'What does that teach the market in the way of transparency?' he asked. 'How does that help the market feel any more comfortable about holding securities held largely based on ratings. We want to know which deals are the worst deals, and releasing those documents would go toward that end'. ... Still, the SEC said 'there is no evidence that decisions about rating methodology or models were based on attracting or losing market share'," my emphasis, WSJ, 9 July 2008.
"Did you hear that giant yawn that swept over Fundland last week? It came when [SEC] Chairman Chris Cox expounded on 'serious shortcomings' in the practices of the nation's three major credit-rating firms, Moody's, Standard & Poor's and Fitch. ... But for all its insights, the report failed to go far enough. The report offered small correctives but stopped short of prescribing strong medicine for a system that is fundamentally flawed because the users pay for their ratings. Imagine a shipwright working for months patching the hull of an old cedar-strip boat only to watch the vessel sink because he ignored the drain plug. The SEC is that shipwright. ... And the SEC concluded by extending an olive branch, saying the credit-rating agencies were co-operative and committed to remedying the issues. The absence of strong preventive measures from the SEC is truly lamentable. ... [Sean] Egan, said [t]he SEC, ... is 'supposed to defend the average investor in those proceedings, not the [banking] industry',"my emphasis, Jack Willoughby (JW) at Barron's, 14 July 2008.
"Who's the most glaring culprit in the subprime mess? ... It's probably the only time we've had a business debacle this wide ranging [with] malfeasance at so many levels. Having said that, the one area that would have prevented all of this from taking place is if the ratings agencies would have had a monetary interest in the accuracy of the ratings they put out", Kirk Shikle's interview of Richard Bitner at US News, 21 July 2008.
"Cognizant of the fees", wow. What Big 87654 junior accountant isn't? The Big Three rating agencies look like the Big 87654 CPA firms. The SEC will do nothing to improve the quality of their ratings. My answer again: repeal 1995's Litigation Reform Act and let the plaintiffs' bar sue away. What would the SEC consider "evidence" of what the models and methodology were based on? Yuri Yoshizawa's affidavit? I am sure the SEC's enforcement division reviews "evidence of wrongdoing". What does it do when it finds such evidence? See who or what it will shield and if it can find a convenient scapegoat to blame? See my 28 December 2007 post.
The SEC will do as much to clean up the rating agencies as it has the CPA firms, nothing. Unlike JW, who was apparently disappointed with the SEC's report, I wasn't. The SEC came up with what I expected.
I agree with Bitner. Sue the rating agencies into doing better work.