SEC Ignored Warnings of Ratings Fraud

Includes: MCO, SPGI
by: Jeff Nielson

In a recent commentary (“U.S. ratings-fraud continues”), I pointed out how (according to a Moody's insider) at least one of the ratings agencies who were the principal facilitators of Wall Street's massive Ponzi scheme was still rubber-stamping fraudulent ratings on “toxic” Wall Street securities.

It has now been announced that the U.S. Congress will be launching a probe over the SEC and the ratings agencies, specifically about allegations that the SEC ignored warnings of ratings fraud as Wall Street's crime-wave was reaching its peak. Even worse, one of the whistle-blowers was a senior vice president of compliance.

According to a Reuters article, Scott McCleskey, a former Moody's (NYSE:MCO) v.p. alleged that “he was routinely ignored when he warned that the firm was not properly monitoring municipal bond ratings.” This is (by far) the most damning indictment of the ratings agencies – for several reasons.

To begin with, this is the area of the agencies greatest expertise, and has traditionally been the heart of their business. We already knew (as I pointed out in that previous commentary) that the ratings agencies simply lacked the capacity to independently analyze many/most of the complex scams devised by Wall Street – and thus relied upon the banksters to tell them how these products should be rated.

This is not the case with respect to rating municipal bonds. These were debt instruments with which Moody's was intimately familiar. The fact that these fraud-facilitators were willfully ignoring their own internal warnings on an ongoing basis about lapses in their own diligence is the most direct evidence to date of willful fraud, as opposed to merely the reckless blindness toward their own ratings standards which was already apparent.

There are further important aspects to this new development. Rating municipal bonds has always been considered the “safe” side of the ratings agencies' business – specifically because historically there has been very few defaults, and thus most of these debts earned the top ratings they received.

If Moody's had suddenly come out (during the heart of Wall Street's fraud campaign) and issued warnings on its municipal bond-ratings, this would have been the proverbial “canary in the coal mine”.

Questions would have immediately been asked, such as “if you're downgrading safe municipal bonds, then how can you be assigning AAA ratings to all these other debt instruments?”

Obviously, the only reply that Moody's could have made to that question is “we don't really understand those securities, ourselves, so their ratings are unaffected.” Naturally, that would have put an end to the Wall Street Ponzi scheme, then and there.

Simply put, there is now an abundance of evidence that at least one of the “big three” ratings agencies is corrupt to its core. However, this report also provides yet more evidence that the SEC is also rotten to the core. When a regulator won't initiate investigations on its own – even during the most rampant wave of mortgage and securities fraud in the history of markets and it also ignores any and every “whistle-blower” who tries to report such fraud, there can be no justification for allowing this bureaucracy to remain in existence.

This is not to say that there should simply be no regulator for U.S. markets. However, in a time of supposed “financial reform”, where a major component of such reform is over-hauling oversight and jurisdictional boundaries, there will never be a better time to simply scrap this blind/deaf/dumb “regulator” and create a new agency – stripped of all the corrupt servants of crime who are currently running this farcical bureaucracy.

One has to ask, what is the purpose of this Congressional probe? We already knew that neither the ratings agencies nor the SEC were doing their jobs, or rather they were intentionally refusing to perform their duties in good faith. Together, these two groups supposedly provided the majority of oversight for U.S. financial markets. The ratings agencies (supposedly) verified the quality of the financial products being sold, while the SEC monitored the integrity and compliance of the players in this market.

We now know that neither of these entities were even attempting to perform those duties.

What possible purpose can this new “probe” serve, if not to simply abolish the SEC, and strip Moody's of its license to rate financial products?

Attempting to determine which pieces of the SEC (if any) can be salvaged, and then to try to patch those fragments into the new regulatory framework which is supposedly underway, is plainly and simply a waste of time and effort. Indeed, it is hard to fathom any purpose for this new government probe – other than to apply a(nother) “coat of whitewash” on another scandal, so Wall Street can continue with “business as usual.”

As I have pointed out on several recent occasions, this is rapidly emerging as the game-plan of the Obama regime. Obama got elected preaching “change, change, change.” Yet, all Americans are actually getting is “business as usual.”

The problem with trying to rid the U.S. of corrupt ratings agencies and corrupt regulators is that before any of that can happen, Americans must find a way to rid themselves of their corrupt, two-party dictatorship. Unless/until that day arrives, we can expect little out of the U.S. government other than more coats of whitewash.

Disclosure: I hold no position in Moody's Investor Service