Wednesday, December 30, 2009
31 More Years?-6
"When the financial crisis began, few players on Wall Street looked more ripe for reform than the Big Three credit rating agencies. ... It was the near universal agreement that potential conflicts were embedded in the ratings model. For years, banks and other issuers have paid rating agencies to appraise securities--a bit like a restaurant paying a critic to review its food, and only if the verdict is highly favorable. ... What explains the timidity of Congress' proposals? This is not a case of lobbyists beating back ideas thay might hurt their clients, say those close to the discussion. Instead, Congress is worried that bold measures may backfire. The Big Three, by allowing companies and public entities to raise money by issuing debt, are an essential engine in the country's vast credit factory, and given the still-fragile condition of the equipment, lawmakers are reluctant to try anything but basic repairs, patches and a new alarm system. ... While Congress may be happy with cosmetic surgery, law enforcement officials are getting more aggressive. Dozens of lawsuits have been filed against the rating agencies, inclduing a case filed on Nov. 20 by the Ohio attorney general on behalf of public pension funds. The Ohio suit, as well as the earlier suits, seeks billions of dollars in damages from the rating agencies and accuses the firms of negligence and fraud. ... But even if there is no foolproof way to reform the rating agencies, the measures that Congress is now backing are strikingly weak, a number of critics say. There is no talk, for instance, about creating a fee-financed, independent credit rating agency, one modeled along the lines of the [PCAOB]. ... Academics and former rating agency employees who have been warning lawmakers about the Big Three for years, say Congress is tiptoeing when it ought to be charging ahead. ... Both bills enhance the power of the SEC to supervise the rating agencies and both require the companies to bulk up their compliance teams. ... 'I think these bills are misguided and wrongheaded because they will have the ironic effect of making the incumbents even more important,' said Lawrence J. White, an econmics professor at the Stern School of Business at New York University. 'They're going to encrust the procedures already in place and discourage new business models'," my emphasis, David Segal at the NYT, 8 December 2009, link: http://www.nytimes.com/2009/12/08/business/08ratings.html.
Even if there was a ratings agency like the PCAOB, who would staff it? Former S&P executives?Until rating agency executives live in terror of being indicted for aiding and abetting securities fraud, nothing will change. Any more than Sarbox cleaned up the CPA business. Why are the Big Three essential? If you can't sue them, they're just paper shufflers. What "foolproof" way fixed the CPA business? What's ironic? Didn't Sarbox help the Big 87654?