05/03/2012 01:20 pm ET

SEC 'Courageously Assails' Small Ratings Agency, Leaves Downturn Culprits Unmolested

If you're like me, you may have noticed the curious way our Wall Street watchdogs tend to operate. For example, a comparison: Harry Markopolos can gift-wrap the case against Bernie Madoff for the SEC and get nowhere, while at the same time Martha Stewart is a heralded example of a scofflaw run to ground by regulators. This sort of creates this impression that the people who oversee our financial system are more or less content to look the other way where the big fish are concerned, preferring to spike the football when a small-timer is called to account.

Well, if that describes your experience, you're likely to get some sense of vindication, if not satisfaction, from Jesse Eisinger's recent story over at ProPublica. In it, he describes how the SEC just lowered the boom on a "tiny iconoclastic ratings agency called Egan-Jones." Their crime? While Eisinger notes that there are some "serious allegations," the SEC has basically hammered Egan-Jones for what amounts to clerical errors.

Now, in the realm of rating agency follies, this sort of pales in comparison to, say, that time all the big boys (Fitch, Moodys, S&P) gave AAA ratings to all those credit derivatives whose mezzanine tranches were primarily composed of arsenic and walrus piss. Eisinger notes that Egan-Jones did business slightly differently.

Before the S.E.C. charges, Egan-Jones was best known for two things: having made some bold calls about shaky credit prospects and having a business model that was different than that of the big boys -- Moody's Investors Service, Standard & Poor's and Fitch. Mr. Egan's outfit gets paid by the users of his ratings; the oligopoly gets paid by the issuers whose debt is going to be rated.

You don't need to be a hedge fund quant to see the conflict of interest: the more ratings, the more profits to the ratings agencies, so the temptation is to be extra lenient. And, boy, were they.

Eisinger notes that Sean Egan, who runs his eponymous agency, "wasn't shy about pointing this out, often through media appearances." So if you have a sinister bent, there's more than a whiff of upholding the rule of rentiers to be sniffed here. But even if you're not inclined toward cynicism, Eisinger's summation seems pretty apt:

This is your S.E.C., folks. It courageously assails tiny firms, and at the pace of a three-toed sloth. And when it goes after its prey, it's because it has found a box unchecked, rather than any kind of deep, systemic rot.

So, they're sort of like the National Collegiate Athletic Association. (Spoiler alert: That is not a good thing.)

SEC Keeps Ratings Game Rigged [ProPublica]

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