Throw back the little ones
And pan fry the big ones
Use tact, poise and reason
And gently squeeze them
-Steely Dan, Throw back the Little Ones
The WSJ is reporting that the Securities and Exchange Commission has suspended small ratings firm Egan-Jones from issuing any “official ratings” on bonds issued by countries, U.S. states, or local governments. They also were suspended from rating securities backed by mortgages. The ban will last the next 18 months.
The basis of the regulatory punishment was negotiated agreement between the SEC and Egan-Jones regarding the filing of “inaccurate documents with the regulator in 2008,” mislead investors about their expertise, and violating conflict-of-interest provisions.
No word on when similar conflict of interest charges are coming for Standard & Poor’s Ratings Services or Moody’s Investors Service for similar misleading, conflicted and otherwise compromised ratings.
The major credit rating agencies were the prime enablers of the credit crisis. They put Triple-AAA ratings on securitized sub-prime mortgage bundles, primarily because they were paid by the underwriters to do so. But for those actions, much of the securitized junk would not have been able to be purchased by the many bond funds, pensions and other large institutional investors mandated to buy only Investment grade paper. (The bond markets eventually figured this out and has learned to ignore the ratings agencies commentary asconflicted and corrupt). Thus, what should have been a tiny, high risk corner of the mortgage market instead became an enormous, A-rated, mainstream asset class for yield hungry fixed income managers. This is why S&P and Moody’s are thus amongst the prime causes of the financial crisis of 2008-09.
It is a damned shame the SEC has to to figure this out and act on it …
This piece is cross-posted from The Big Picture with permission.