Money managers still want their ratings agencies: moral hazard lives

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The Wall Street Journal laments today the weak stance the Obama regulatory overhaul took on the credit rating agencies. Indeed, on the really tough questions, the administration seems to have waffled. But the SEC may trump the Administration on this one — if it’s willing to battle opposition from an unexpected quarters:  money managers who depend on them.

First, a peek at the editorial page of the Journal:

If world-class lobbying could win a Stanley Cup, the credit-ratings caucus would be skating a victory lap this week. The Obama plan for financial re-regulation leaves unscathed this favored class of businesses whose fingerprints are all over the credit meltdown.

The government-anointed judges of risk at Standard & Poor’s, Moody’s and Fitch inflicted upon investors the AAA-rated subprime mortgage-backed security. They also inflicted upon the world’s nest eggs the even more opaque AAA-rated collateralized debt obligation (CDO). Without the ratings agency seal of approval — required by SEC, Federal Reserve and state regulation for many institutional investors — it would have been nearly impossible to market the structured financial products at the heart of the crisis. Yet Team Obama suggests only that regulators reduce the agencies’ favored role “wherever possible.”

via A Triple-A Punt – WSJ.com.

As I write, the SEC is debating final rule changes on the role the ratings agencies play in the financial industry. The rule to watch: 2a-7 of the Investment Company Act of 1940. That rule was inserted when money markets were a wild west — no one was sure what went into them. The rule required that money market managers invest only in top rated securities by anointed credited rating agencies, formally known as National Recognized Statistical Ratings Organizations.

Now the law of unintended consequences has kicked in. At the time, the regulators thoughts they were doing investors a favor. But instead they were setting them up because they didn’t realize the ratings agencies would behave so irresponsibly, handing out triple-A ratings to just about anything Wall Street sent their way (and also paid for).

Surprisingly, not only do the rating agencies oppose amending the rule to eliminate the role of NRSROs in the money market world but so are a number of investors: They don’t want to or have the means to do the credit rating work — in which case you could argue they should get out of the investing business. But why should they? If the ratings agencies mess up and then the money managers find themselves sitting on nuclear waste, no problem. Uncle Sam cleans it up.

It’s not clear that the SEC will have the political will to take away the feeding trough from the ratings agencies. If not, legislation is already started to bubble up. The question: just how many opportunities will policymakers miss to fix the ratings agencies?

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3 thoughts on “Money managers still want their ratings agencies: moral hazard lives

  1. One would think that after shoving taxpayer and borrowed funds from our communist friends into the maw of this crisis the first consideration would be, “This can’t happen again.”

    Yet Obama’s brain trust have let all the ingredients of the disaster in place. No oversight of fraudulent rating companies, (anyone remember Enron and Arthur Anderson?), no end to companies that are too big to fail, no cap on compensation for taxpayer owned companies, no insurance that the regulators will improve or are immune to political interference and finally no accountability for the crooks who wreaked the economy, not even an investigation. But what can you expect when you put foxes in charge of repairing the hen house.

  2. Nancy, you nailed the 2 real problems.

    1) conflict of interest
    “they didn’t realize the ratings agencies would behave so irresponsibly, handing out triple-A ratings to just about anything Wall Street sent their way (and also paid for).”

    2) no penalty for imprudence.
    “no problem. Uncle Sam cleans it up.”

    as long as we maintain these 2 conflicts, any talk of reform is just that. talk. we can fully expect more spectacular disasters.

    “The question: just how many opportunities will policymakers miss to fix the ratings agencies?”

    it’s not going to happen. Goldman Sachs is Tim Geithner’s (and Congress’) advisor along with other major financial services industry players like Morgan Stanley. they’re now tailoring the country to their needs and objectives. i’m not saying that’s good or bad. that’s just the way it is. and we can’t change it. both parties have the same subservience to the financial services industry.

  3. Pingback: OLGA LEDNICHENKO – TRUTH AND DISCLOSURE IN BANKS+LENDING _AND -TRANCHE – Article and Response on True/Slant « Polina – Sasha – Olga -Olya – Lednichenkos from NESHER-ISRAEL

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