Credit Crunch: SEC And Rating Agencies Is Not Easy Match
SOME will think this a good thing, I, along with others, will differ:
Seven of the world’s leading credit-ratings agencies have fallen under the regulatory auspices of the US Securities and Exchange Commission as part of the clampdown on the sector.
The SEC will now have full oversight of the work of the agencies, which were heavily criticised during the credit crisis for their apparent role in legitimising complex debt instruments by giving them healthy credit ratings.
As a result of the move, all of the agencies will have to disclose how they assign ratings, an issue which has proved to be controversial of late as the credit crisis took hold of institutional investment markets. The seven include the three major players – Standard & Poor’s, Moodys, and Fitch – as well as agencies less well known outside the banking fraternity such as A.M. Best and DBRS.
Now we do know that one of the causes of the credit crunch was the way in which the ratings agencies happily waved through all sorts of toxic junk as prime investment grade bonds and commercial paper. Tottering pyramids of ever greater complexity were then built on top of those ratings.
So having them overseen more closely by the bureaucracy would be a good idea then, yes? Well, not necessarily. For it dosn’t actually change the basic mismatch in incentives here. Bond issuers pay the ratings agencies, not bond buyers. So we’ve still got a he who pays the piper calling the tune problem here.
But rather more importantly than that, bureaucracies are not notably efficient at regulating fast moving markets. Look at the way the FSA is still scrambling after Northern Rock: the commercial paper markets and the depositors have already given their verdict and we’ve yet to hear anything of substance from the regulators. Worth remembering too that Enron was shut down by the markets when they uncovered the skullduggery long before any bureaucrat had even sharpened his pencil.
What we need is a change in the incentives the ratings agencies face, not another layer of box tickers.
Posted: 27th, September 2007 | In: Money Comment | TrackBack | Permalink
