New SEC Regulations Fail Miserably to Address the Real Issues

The long awaited regulatory framework to rein in the Financial sector was announced Wednesday. Not surprisingly, it did not address the most important issues hovering over the economy and serves only to reinforce the hands off management style that has always been the trademark of this supposed Gatekeeper of Financial Sanity.

The new regulations, due to take effect in 60 days, only affect the ratings agencies; Standard & Poor's (MHP), Moody's Investors Service (MCO) and Fitch. These agencies are responsible for the issuance of ratings for public companies and securities, thus defining the ability of the former to raise credit and at what cost the latter will be purchased by banks, mutual funds, state pension funds or local governments. Stock prices and investor confidence take their cue from the big three and the effect on the market when ratings are graded higher or lower is enormous.

The room here for grave conflicts of interest is evident. Ratings agencies can advise a financial house how to pack securities to warrant a favorable rating. Insider trading or rather more accurately put, the intelligence network amongst the Financial industry and its associated "regulators", has resulted in enormous profits for some and collapsed companies with the associated real economic backlash, for others.

S&P, Moodys and Fitch are also responsible for the rating of derivatives, CDSs and mortgage backed securities (MBSs). The latter activity was not included in the recommendations issued by the SEC because that proposal drew opposition from Wall Street. The same Wall Street that brought the economy to its knees through vicarious dealings in toxic junk "opposed" any regulation of the latter. The revolving door between the SEC and Wall Street just turned again and play has not been interrupted by the minor worry of a collapsing economy; nothing happening here, move on. Once again, the real Sword of Damocles is just hoisted higher and threatens to fall with an even greater destructive force than before. The longer this game goes on unrestricted, the graver the consequences.

So what has the SEC put forward as the new regulations?

Ratings agencies are now banned from advising financial houses on how to package securities to obtain favorable ratings. Gifts of over $25 from clients are also banned. Now the question begs to be asked: if these same financial houses have been packaging securities to achieve good ratings for years, would they not have learned how the system works? It's not like they are newborn babes.

Interestingly enough, a proposal to separate, within the ratings agencies themselves, those employees who work in the credit analysis department and those who generate income, was not adopted. So intelligence flows between the investment and rating sectors has not been throttled within the ratings companies themselves. Can we assume that the investment sections of Moody's and other financial houses talk on the phone or play golf together?

Like Paulson with his "bailouts", the SEC shows as much enthusiasm to fix the problems that urgently need to be addressed. But, then again, the symbiotic relationship between the "regulators" and the "regulated" must continue in order to pick the last piece of meat off the bones of the fallen. It will only be then, when nothing remains to be scavenged, that we can expect a giant mea culpa on their behalf..."We never saw it coming".

Comments

[Nikola:]

Not much different than the China described in "One Billion Customers"

2008 Dec 05 04:59 AM

[Buffer:]

Great article right on the money. Having recently retired for the money management profession and living throught the 60's 70's 80's and 90's in the business the SEC seems to be getting worse not better. Investor confidence should be the focus not an after thought on their part. What a do nothing group of bureaucrats.

2008 Dec 05 09:17 AM

[ain't no fo...:]

You're WAY too kind to the SEC and the ratings agencies.

WAY too kind.

2008 Dec 05 09:49 AM

[carey_jim:]

I've always said that the SEC should issue a publicly traded stock which pays dividends based on the profit it makes from all its regulatory practices.

At least the public could derive some benefit from its activities that way.

2008 Dec 05 10:49 AM

[happysoul77777:]

The SEC does not protect investors, It protects the market makers, hedge funds and big brokers.

2008 Dec 06 12:59 AM

[Dan Juran:]

Why are you constantly complaining about the supposed faults of the rating agencies? Why the aggrieved tone that dominates your coverage of them? I assume Seeking Alpha, given the fancy Greek word it references, presumes to cater to sophisticated money managers. Therefore, I would assume that the very same money managers consider ratings only one factor when selecting securities but also DO THEIR OWN HOMEWORK. Therefore, I would assume that your audience finds your casting of the ratings agencies as the villain and your audience as the victim tiresome if not insulting. Money managers who do their homework do not rely solely or even primarily on ratings but on their own judgment and therefore do not blame someone else for their own mistakes.

2008 Dec 08 01:09 AM

[MakersMark:]

To Dan Juran: The ratings agencies fueled the entire housing crisis with their AAA ratings of junk. Get a clue. The SEC big shots get a kushy job as soon as they leave the agency. The big Wall Street firms have them in their pockets. Do your homework. Or perhaps you know this and are deflecting...

2008 Dec 17 01:21 AM

[Dan Juran:]

I do my homework and therefore I don't point fingers at others when things go wrong. The agencies have acknowledged that assumptions made in models used to rate complex mortgage backed securities proved wrong. Perhaps you don't make mistakes but I certainly do. There were many actors to the housing crisis. Many players made mistakes - including very experienced ones. Your narrative might be satisfying to you and certainly many others, but the dynamic was more complicated and less nefarious than you portray. But everyone runs with the simple story.


On 2008 Dec 17 01:21 AM MakersMark wrote:

> To Dan Juran: The ratings agencies fueled the entire housing crisis
> with their AAA ratings of junk. Get a clue. The SEC big shots get
> a kushy job as soon as they leave the agency. The big Wall Street
> firms have them in their pockets. Do your homework. Or perhaps you
> know this and are deflecting...
>

Jul 30 11:15 PM