Monday, April 30, 2012

The SEC's Egan-Jones Witch Hunt

"Egan-Jones Ratings Company rates the credit worthiness of U.S. corporate debt issuers, and is wholly supported by investors to minimize the potential for conflicts of interest in accessing credit quality. On Dec. 21, 2007, the SEC granted Egan-Jones nationally recognized (NRSRO) status. Sean Egan appeared before Congress on October 22, 2008 and argued that issuers of complex securities "shopped" for ratings which resulted in a race to the bottom in terms of credit transparency. Rather than "beat up Moody's and S&P for behavior" they'd been financially motivated to pursue, the government needs to support a new business model paid for by investors, not issuers, he asserted. Egan-Jones on July 16, 2011, became the first agency to cut its rating on the United States from AAA to AA+. And on April 16 2012, Egan- Jones downgraded the credit ranking of the United States for the second time from AA+ (Excellent) to AA (Very Good). Egan-Jones was also the first to downgrade WorldCom and Enron."  In other words, Egan Jones has been early, accurate, and ethical in issuing credit ratings - exactly what investors need.  From BBG's Jon Weil: "Egan, a lonely voice of reason who saw the financial crisis coming, has shown his larger competitors to be incompetent or compromised. So if you had told me back then that the SEC more than four years later would be accusing Egan and his firm of securities-law violations - but not any of the big 3 rating companies - there’s no way I would have believed you. That’s what happened this week, though."  The SEC has a) ignored Moody’s conscious decision to keep inflated ratings on complex notes, b) found that the Big 3 and four smaller NRSROs appeared to have some weaknesses with respect to their employee securities ownership policies and procedures (but has taken no action), and c) reached a settlement with another small credit ratings company, Lace Financial Corp., over allegations of misstatements in its application for SEC recognition, but has decided to lay charges against Egan-Jones on the same grounds.  "The way Congress and the SEC have rigged this game, nationally recognized credit raters are a unique species of opinion merchants, endowed with sweeping authority and special privileges. Institutional money managers often are required by law to abide by their judgments. The better approach would be to scrap the designation, so investors are encouraged to do their own homework, rather than use credit ratings mindlessly. Egan-Jones ... chose to play within the Big Three’s system, exposing itself to regulation and the whims of the SEC in exchange for the government’s imprimatur. Now it’s paying the price."  Sounds to me like a U.S. government witch-hunt.