- Wealth PMS
Bloomberg: S&P calls for greater regulation on credit ratings. (Hat tip: The Big Picture)
Standard & Poor’s called for more regulation of credit-rating companies, recommending a global framework that would eliminate potential conflicts of interest, increase transparency and create an industry code of ethics.
New rules should ensure ratings are independently derived and unbiased, the methods they use are disclosed and regulators are given the authority to sanction companies if they fail to comply with “appropriate policies,” the unit of New York-based McGraw-Hill Cos. said today in a white paper outlining 10 goals for policymakers.
Ratings firms including S&P and Moody’s Investors Service, the two biggest, have been blamed by regulators and investors for giving top AAA ratings to structured securities that later defaulted. In the paper, S&P tries to get ahead of efforts in Congress and Europe to regulate its industry by laying out its own terms. S&P acknowledged assumptions haven’t held up in evaluating structured securities backed by subprime mortgages.
“These guys messed up big time,” Lawrence White, professor of economics at New York University’s Stern School of Business, said in an interview. “The initial ratings for mortgage-related securities, especially in the 2005, 2006 period, were horribly overly optimistic. And we the general public, we the U.S. economy, we the global economy are paying a big price because of that over-optimism.”
Greater regulation will help restore investor confidence in the credit markets and ratings companies as long as the rules are applied consistently worldwide and the analysts remain independent, Rita Bolger, head of global regulatory affairs at S&P, said in an interview.
The key problem is the SEC requirement since 1975 that certain funds and financial firms can only invest in debt ranked investment grade by companies considered nationally recognized statistical ratings organizations, which helped give Moody’s and S&P a stranglehold over the industry, White said. Removing that requirement would do more to engender competition than additional regulation, he said.
The group’s designation should be revoked for investments in structured products because credit ratings are unreliable in determining the risk of securitized assets, said Janet Tavakoli, founder and president of Chicago-based Tavakoli Structured Finance Inc., which advises banks and hedge funds.
“Standard & Poor’s completely dodges addressing this issue” in the white paper, she said in an interview. “They’re kicking sand in the face of investors and regulators.”
The last bit is simply the most important: that certain funds HAVE to invest in highly rated products only. Remove that, and it doesn’t matter what else you do; when you don’t require their opinion, the rating agencies will come crawling at honesty’s door.
Our pension funds seem to have gone back to the old funda of requiring a rating, from the expert group recommendations I had mentioned. New post on that coming up! (Basically, it looks like our pension policy has gone retrograde, to requiring a rating for the “C” part of pensions)
Like Barry says in The Big Picture, just new norms for rating are not enough. Disgorge all fees for whatever failed while being rated AAA. Immediately.