SEC Chief: Tighter Oversight Of Rating Firms Needed

WASHINGTON — The head of the Securities and Exchange Commission said Wednesday the agency must do more to tighten oversight of Wall Street's credit-rating industry to help bolster investor confidence. Proposals to reshape the industry and its supervision were advanced at a public forum hosted by the agency.

The SEC is examining competitive issues, potential conflicts of interest and government oversight of the $5 billion-a-year industry dominated by Standard & Poor's, Moody's Investors Service and Fitch Ratings. The firms have been widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities, whose collapse helped set off the global financial crisis.

"As much as (the SEC has) done, there is still more to do," SEC Chairman Mary Schapiro said. "The status quo just isn't good enough."

Schapiro said the SEC must determine whether increased competition would benefit investors and how it would be achieved.

Elsewhere Wednesday, European Union governments and the European Parliament agreed on a preliminary deal on new rules that will expand oversight for the rating agencies.

The agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company's ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.

The agencies had to downgrade thousands of securities backed by mortgages as home-loan delinquencies soared and the value of those investments plummeted. The downgrades contributed to hundreds of billions in losses and writedowns at major banks and investment firms.

Officials of S&P, Moody's and Fitch speaking at the SEC event said their firms have taken steps to enhance accountability and transparency.

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"We have been actively applying lessons from the current crisis to adopt a number of measures aimed at restoring investor confidence," said Deven Sharma, S&P's president.

Some market stakeholders are calling for creation of a new oversight board for the rating industry, paralleling the independent board overseeing the accounting industry established by Congress after the corporate scandals of 2002.

The credit-rating system is "fundamentally broken," said Damon Silvers, associate general counsel of the AFL-CIO, which is a major shareholder in public companies. "It's not a question of a tweak here and a tweak there."

Joseph Grundfest, a law professor at Stanford University and former SEC commissioner, suggested establishing a rating agency owned and controlled by the investors to make parallel ratings matching those issued by the big Wall Street agencies paid by companies.

That would spark competition and give investors "a seat at the table," Grundfest said. The notion appeared to intrigue Schapiro and the other SEC commissioners.

The SEC has undertaken several actions to enhance oversight of the industry under authority it gained in 2006 legislation, Schapiro said, but more must be done.

In December, the SEC adopted new rules designed to stem conflicts of interest and provide more transparency for the ratings industry.

Among other things, the rules ban the rating agencies from advising investment banks on how to package securities to secure favorable ratings. Gifts over $25 from clients also are prohibited.

Rating agencies are banned from making ratings in cases where the agency made recommendations to the company issuing securities or the investment bank underwriting them concerning the corporate structure, assets or activities of the issuing company.

But the SEC commissioners did not adopt a controversial proposal to require ratings of complex securities, such as those underpinned by mortgages, student or auto loans, to be distinguished by a special identifier from those for more traditional securities like corporate or municipal bonds. That proposal drew opposition from Wall Street when it was floated previously.

Comments

[bexe]

The rating agencies are guilty of fraud and should be prosecuted. They mislead investors with their fraudulent ratings that caused all this pain and destruction.

[norkas]

bexe you are soooooo correct. These firms lied and cheated investers. They are not even being investagated and we are suppose to believe these lowlifes again.?

This is a open road for rating companies to do it again because there is NO law being enforced.

They are laughing and Moodys and others need to be examined carefully.

Last 8 years was one BIG PONZI

[hellboundtrain]

Abolish the SEC. Replace it with a new agency with all new people that may know of the concepts of accountability, transparency, honesty all in the name of public service, not failing to preform in order to kowtow to Greed St.

As it is, like so much: a disgrace!

[norkas]

The Sec was told to call any of the so called people doing the trades more Madoff. This was said by someone with proff of a Ponzi in 1999. The SEC did not even make a call to see if the stocks were really traded. Who paid off the SEC?

[Michael Cohen]

S&P needs to be accountable for this mess. Please file this matter under 'DUH'...

NINJA loans magically transformed into gold? c'mon, REALLY? Really?

[remainderman]

isn't this the same person who led the SEC to completely miss the Madoff fraud when outsiders were spoon-feeding it the proof?

not very reassuring.

[denlong]

I noticed in the quote below that they have taken steps to ENHANCE accountability, not to be accountable

"Officials of S&P, Moody's and Fitch speaking at the SEC event said their firms have taken steps to enhance accountability and transparency"

[ErnestineBass]

Enhance...

Hmmm...an ENHANCED bustline is just another way of saying fake b o o b s.

[DRaymond]

I am glad that somebody is finally looking hard at the rating agencies.

Right now everybody agrees that the CDOs are too complex to be able to have the risk judged.

Were they any less complex when these companies were giving them investment grade ratings? No. So how were they able to come up with those ratings? The only explanation is that they were just rubber stamping them and collecting huge fees for doing so.

All it would have taken is for ONE of these firms to have some integrity and say 'this offering is too complex and opaque to accurately evaluate the risk entailed" and the others would have had to think twice or look like fools later and the whole industry would have had to straighten out and make bonds that actually deserved investment-class ratings.

And it wasn't a matter of nobody knew. Vanguard Funds announced to its customers that their funds had no exposure to the mortage backed securities because their own review of the bonds showed that they were junk. So Vanguard could figure it out but the 'professional rating agencies' couldn't?

[RofWH]

"All it would have taken is for ONE of these firms to have some integrity and say 'this offering is too complex and opaque to accurately evaluate the risk entailed" and the others would have had to think twice or look like fools later and the whole industry would have had to straighten out and make bonds that actually deserved investment-class ratings."
So Moody's would have said "no way" and the packager would go across the street to S&P and for the huge fees (millions in most cases) and S&P would have said "Oh sure. AAA" and gladly look like fools for all that cash.
And that is why the ratings agencies need to be strictly regulated and big, big fines imposed for bad works.

[denlong]

These people (Moody's and S&P etc) had no problem rating junk securities AAA, yet yet these firms are still considered reputable. Mark Zandi of Moody's and many reps of S&P are still considered experts by the business press.

[StevieRae]

When one looks at how did we get into this absolute disastrous mess, Ms. Schapiro is on point.

The rating organizations told investors, investment managers of mutual funds, 401-K administrators, retirement fund investment managers, etal that these "mortgage-backed" securities were INVESTMENT GRADE.

While others may have "invented" these questionable financial products, it was the rating organizations that legitimized them by rating them AAA. Aside from changes to these rating organizations, the Justice department must investigate criminal wrongdoings.

[kanester]

Sorry for repeating on some of the other comments, but "Duh. Ya think?"

Any agency that can lump a bunch of "Z" rated securities into a new "AAA" rated instrument shouldn't only be regulated "with extreme prejudice," the originators of this fraud should be doing jail time.

Any agency that builds a risk model that doesn't account for the underlying assets LOSING value ... ditto above.

Any agency who doesn't support a request by one of their own raters to view the asset documents that are counted on to underwrite an investment instrument ... ditto.

Any agency that says "We are a ratings agency ... we could even rate a cow!" in an email ... same thing.

Of course, Mary Schapiro is a suck-up, part of the problem like Geithner and Summers. This says it all:
"But the SEC commissioners did not adopt a controversial proposal to require ratings of complex securities, such as those underpinned by mortgages, student or auto loans, to be distinguished by a special identifier from those for more traditional securities like corporate or municipal bonds. That proposal drew opposition from Wall Street when it was floated previously­."

[ErnestineBass]

That last sentence says it all.

Wall Street howls and the SEC bows.

Disgusting.

[iridium53]

Thank you, Mary Schapiro, for a blinding flash of the obvious.

Where was this tremendously obvious insight when you were immediate past chairperson and CEO of the Financial Industry Regulatory Authority, the securities industry self-regulatory organization for broker-dealers and exchanges in the United States?

Your insight, at this point, is rather like shutting the barn doors after the cows have gotten out.

How impressively precient you are not.

Leadership is not, apparently, one of the long suits of the Obama Administration nominees for these positions.

[Sundialsvc4]

Let us stop using "kind words" here. The rating-agencies materially participated in a swindle. They enabled trillions of dollars to be stolen by means of L-Y-I-N-G about the credit-worthiness of these so-called "securitie­s."

It would seem to me from comments like Ms. Schapiro's that these actions are nonetheless being seen as "misguided but not fundamentally criminal." "Oh, we really need to make sure they're more honest. They promise to take steps . . ."

Clue ya: when someone has stolen trillions of dollars, you do NOT go up to that person, stroke his wrists and say, "promise not to do it again? Really? You promise?"

No... first you throw that crook in jail, THEN you start asking some very tough questions to the local Chief of Police.

Crime ... cannot(!) ... be "coddled." It cannot be dealt with on its own self-appointed terms. This crime proclaimed itself to have access to "an unlimited pot of money," and with that pot, it bought influence. (Including you-know-w­here.) If high crime is allowed to persist, it WILL destroy everything.

Everything.

We must not allow this to happen ... to our precious Nation.

[Sundialsvc4]

I frankly must lodge a "vote of no-confidence" about the SEC.

"Oh, fine. Goody. NOW you say that 'something needs to be done,' after having done nothing for fifteen years." Face it, people: you DID know what was going on, and you did NOT intervene. Even today, you withdraw enforcement efforts as the article suggests ... when a "proposal drew opposition from Wall Street when it was floated previously­."

Basically, both the Congress and the SEC now stand as de-facto "accessories to a crime," hence the word "high crime" can be used, for which impeachment is the prescribed penalty. It just isn't good enough when you allow a multi-trillion dollar swindle to go on for a dozen years, and you "knew or should have known" that something was not as it ought to be, and yet you did nothing.

"It's a little too late to do the right thing now" for your supposedly-august Commission. The SEC not only failed to prevent crime, but actively participated in it. So I aver.

[TJCole]

Duh...!

[LeeCalif]

The SEC and the Warren Oversight Panel are kept from having enough power.

If Shapiro and Warren are each sounding alarms and ignored, the Bush Depression will come full force.