Credit Ratings Finally Get Leashed

The actions of Moody’s, Standard & Poor’s, and Fitch helped trigger the greatest credit crisis of all time. Each has been investigated and dragged before Congress because of AAA ratings that they gave to dangerous pools of mortgage derivatives. Several executives resigned from the companies in the process. Not a single one of the agencies was severely punished. All three do business unfettered by government regulation. They have returned to the time when they oversaw themselves.

The SEC means to make the three companies less independent. The plans may do little to change the activities of Moody’s, Standard & Poor’s, and Fitch. But, the SEC action is at least a warning that the rating process will not go unchecked. It is a shame that it took the credit crisis to get the agency to act.

“The proposed rules would implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and enhance the SEC’s existing rules governing credit ratings and Nationally Recognized Statistical Rating Organizations (NRSROs),”  the SEC says.

The program may be as good as it is described by the agency, but the cash-strapped agency is having trouble carrying out its existing duties.  Adding new oversight of credit ratings agencies may be asking too much of the SEC. The new regulations would require each agency to report its internal controls, police conflicts of interest, establish standards for analysts and publicly explain its methodologies. It is a grand plan which will never be enforced.

Among the three agencies, they issue dozens of ratings and ratings changes per day. Those ratings range from sovereign debt to municipal paper to bank instruments to corporate balance sheet risks. An effort to police all of these is unrealistic and the agencies will claim, prohibitively expensive.  In fact, the costs will be the first objection they raise.

The SEC, though, has little choice. Fitch, S&P, and Moody’s were barely sanctioned financially after the disaster they helped cause in 2008 and 2009. The fact that the new regulations will be costly is part of the cost they must accept because of their appalling behavior.

Douglas A. McIntyre