The Obama administration has delivered its proposal for fixing the credit rating companies that so contributed to the near meltdown of the global financial system.
Is it enough to get the job done? Not in my view.
 The 18-page draft for legislation sent to Congress on July 21 would require:
- Each rating company would have to register with the Securities & Exchange Commission (SEC.) The SEC would then require each rating company to document its policies for determining ratings.
- The SEC would examine the internal controls, due diligence standards, and the implementation of rating policies.
- Rating companies could not consult with any company they rate and each rating report would have to disclose the fees paid by the issuer of the financial instrument rated.
- Each rating company would have to designate a compliance offer who would report direcly to the company’s board or to a senior officer of the company.
- Issuers would have to disclose all preliminary ratings received from all rating companies so that investors would have a history of any shopping for ratings.
My thoughts? I doubt that this will improve the rating business much. There’s too little genuine independence where it’s needed and too much reliance on an under-funded and under-staffed SEC.
For example, we know from the news at Wall Street companies with much stronger risk management and compliance policies than advocated here that compliance managers get rolled when profits are at stake. Compliance officers, to be effective, need a mandate to blow the whistle and a clear someone to blow the whistle to who has the power to prevent reprisals.
The SEC doesn’t have the budget to do its current job let alone take on this new task. If the Obama administration is serious about fixing the problem, the evidence that really counts isn’t pages of new regulation but additional dollars in the budget for enforcement.
What does that mean, stay on the right side of the law? My impression was that many 401k and pension managers were extremely conservative and would only consider investments with AAA ratings because that was a requirement of the 401k that they managed. And I thought that contributed to a lot of our troubles, that somehow mountains of CDO’s obained AAA ratings, making them acceptable investments to the 401k’s when in fact they were accidents waiting to happen. Is there a requirement in the tax code regarding minimal levels of security ratings in order for a 401k to maintain its tax deferred status? I would assume so, and I would assume that would also be the investment philosophy of many 401k’s looking to protect the interests of their investors. Not a lot of penny stocks in the old 401k.
One of the wonders of the system that we’ve creatged, though, is that many kinds of money managers are required to buy assets with certain ratings in order to stay on the right side of the law. Tends to push managers into looking for ratings and ratings only when moving billions around.
I wonder, though. I owned some financial trust preferred stocks rated AAA by Moody’s and S&P at the time of their IPO which I sold in April of 2008 when things started to go south. I can’t believe there would be anyone out there who would give any weight to anybody’s AAA rating now. I sure wouldn’t.
(Doesn’t seem to be any way to paste a picture of a martini glass to the end of this post. Rats.)