Friday, September 25, 2009

The SEC and the credit rating agencies go from bad to worse

Floyd Norris reports:

The rule adopted last week says that whatever information is given to the agency hired by the issuer to rate the structured finance security must be given to other rating agencies, including those that provide analyses only to investors who pay for them.

The result will be that analysts for the other rating agencies, like Egan-Jones Ratings, will have access to information not available to the general public, and their analyses will go only to clients. Those clients will have the benefit of nonpublic information, or at least of their agent’s analysis of what it means.

The answer is obvious: Cut off the inside information. The rating agencies now have an exemption from the S.E.C.’s Regulation FD, for fair disclosure. If that exemption were removed, the level playing field would be restored. And the respect that ratings now get from people who assume the raters know more than they do would fade away.

There could be temporary exceptions, to allow companies to tell the raters of plans not yet announced — like a takeover — so that the rating agencies could issue their opinions as soon as the announcement is made. But when they did issue the ratings, whatever information the agencies were given would also have to be made public.

Instead of ending the exemption for rating agencies, the S.E.C. broadened it to include agencies that are newly able to demand the information.

There would be another advantage to a rule that said rating agencies got the same information as other analysts. Money managers who lost a lot of their clients’ money in collateralized debt obligations and other funny pieces of paper have been able to blame the rating agencies for misleading them, and thus try to escape responsibility.

In fact, those managers had the obligation to understand what they were buying. The management fees they were collecting should have covered more work than checking out what Moody’s had to say.

In a world where it was clear that Standard & Poor’s had the same information as everyone else, it would be a lot easier for the rest of us to weigh the wisdom of a given rating. The prestige of a Fitch rating would depend on its reputation for superior insight and analysis, not on its access to confidential information.

To me, this is just the latest example of the government eschewing competition for itself and any of its chartered institutions. The government exempts itself from antitrust regulation, even the soft accountability of individual choice and free market--that is the big underlying problem.

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