We know the major ratings agencies suck. We know their business model was payola. We know they sold ratings for cash, committed fraud on structured product investors. We know they hid significant modeling errors, and then hid these problems from the public and regulators.

Might their free ride be coming to an end? The SEC is tightening existing regulations that might restrain the big 3′s worst instincts.

First, a reminder of how criminally corrupt they are:

“In early 2007, according to the S.E.C., a Moody’s analyst discovered a significant flaw in one of its ratings models that inflated the grades assigned to a new type of debt called constant proportion debt obligation notes. Roughly $1 billion of these securities had been issued — carrying high Moody’s ratings — when the flaw was detected.

Rather than own up to the error, Moody’s officials fixed the model quietly, the S.E.C. said, leaving the inflated ratings intact. Because the notes were performing well in the market then, a Moody’s downgrade would have raised many questions and might have pushed Moody’s to disclose the existence of a problematic model. Recognizing the harm this would cause its reputation, Moody’s covered up the problem, the S.E.C. said.”

That is but one reason why Moody’s senior management, IMO, should be in Federal prison.

The SEC’s latest attempt to reign in the Rapings Ratings Agency is an extension of Regulation AB.

What is Regulation AB?

-Boilerplate offering statements (shelf registrations) are no longer allowed. Individual disclosures are required;

-Complex securities cannot be sold without adequate time for investor investigation;

-Requires increased disclosures and more detailed data about assets in the pool;

-The cash flow waterfall — the order of loan cash flow disbursements to investors — is required upfront, and must be made available to the public;

-CEO certification: prior to any issuer/sponsor making a shelf offering, their CEO must certify asset quality (the pool is “as advertised”). This creates a Sarbanes-Oxeley like liability.

-New disclosures MUST show prior securitized failures. Prior pool asset of originators/sponsors that were repurchased due to failure must be disclosed, with actual dollars amounts of losses/repurchases revealed;

-Independent parties must monitor the pools post-sale to see if the securities are performing as forecast;

-Most important of all, structured product registration can “no longer be based solely on the fact that its securities have received an investment-grade rating.”

In other words, the Ratings agencies are being downgraded by the SEC.

>

Source:
BB? AAA? Disclosure Tells Us More
GRETCHEN MORGENSON
NYT, September 4, 2010
http://www.nytimes.com/2010/09/05/business/economy/05gret.html

Category: Analysts, Bailouts, Credit, Legal, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “Regulation AB: Downgrading the Ratings Agencies”

  1. snapshot says:

    Subprime Auditing – The Fox In The Chicken Coop

    Add to that….

    Subprime auditing and reporting standards – the Fat 4

    These are supposed to be the folks in charge..What a friggin joke.

  2. Tarkus says:

    And let’s hope we’re rich and retired before this house of cards falls.
    Because it could be structured by cows and we would rate it.

    BTW, that’s not knowingly committing fraud, that’s earning your bonus.

  3. machinehead says:

    ‘That is but one reason why Moody’s senior management, IMO, should be in Federal prison.’

    Failing that, every state has common-law fraud statutes.

    Why these disgraced scammers are not in the dock is a troubling mystery.

  4. machinehead says:

    ‘That is but one reason why Moody’s senior management, IMO, should be in Federal prison.’

    Failing that, every state has common-law fraud statutes.

    Why these disgraced scammers are not in the dock is a troubling mystery.

  5. obsvr-1 says:

    Reg AB looks to be a step in the right direction, but it will be in the enforcement that matters so hopefully the SEC and other regulators will get teeth and resources to perform adequate enforcement.

    just picking on one of the new rules:
    -CEO certification: prior to any issuer/sponsor making a shelf offering, their CEO must certify asset quality (the pool is “as advertised”). This creates a Sarbanes-Oxeley like liability.

    Creating a Sarbanes-Oxeley liability didn’t seem to produce any meaningful results (exec punishment) from the current financial debacle, so why should we think it will matter to the ratings execs ether ?

  6. FrancoisT says:

    “That is but one reason why Moody’s senior management, IMO, should be in Federal prison.”

    Do you know how many more people would end up in Federal prison if one group of Wall Streeters started the perp walk? It’d be a cascade, then a tsunami: Why the hell do you think FinReg was passed BEFORE a REAL, a la Pecora, Commission was created and functioning as a real Commission of Inquiry should?

    Please note the actual Angelides “Commission” is a creature of bipartisanship: just that makes it deeply flawed, suspicious and practically worthless.

    This is a government of Wall Street, by Wall Street and for Wall Street. Those who do not have wealth do not matter one bit…and I have the graph to prove it here:

    http://motherjones.com/kevin-drum/2010/09/repeal-bush-tax-cuts-for-wealthy

    Furthermore, just watch “Inside Job” when it come out in theaters.

    This Republic may be fucked beyond redemption.

  7. FrancoisT says:

    While we’re talking about criminality, should anyone be surprised Moody’s senior management isn’t in Federal prison, when the DoD refused to prosecute 212 military personal who bought hard core child pornography?

    http://news.yahoo.com/s/yblog_upshot/20100903/us_yblog_upshot/pentagon-declined-to-investigate-hundreds-of-purchases-of-child-pornography

  8. FrankJohn says:

    Barry,

    Its not just the rating agencies who were asleep, inept, or just turning a blind eye… It is all of wall street. The idea of ratings agencies is a good idea, it is just very tough to execute on an independent basis. Ratings is no different than Equity Research at the Banks, if the banks crap on companies they lose exposure to CEO’s thus losing exposure to making money for their firm when they don’t have the inside track for their HF clients…. ALL OF WALL STREET IS PAYOLA, every single part of it….The bigger problem is NOBODY CARES, thats the AMERICAN way all of a sudden, NOBODY CARES that their numbers are wrong as long as they are getting their paycheck…Every single aspect of wall street has some sort of pay to play component, that is how it is set up…. A totally independent capable rating agency will never work unless banks,munis, corps are forced to pay into some independent pool of money to have things rated…. The same can be said for auditors… auditors never catch fraud, why is that…. they are usually fresh college grads who have no idea what the heck they are auditing, the whole systems stinks and needs real overhaul not just empty BS words … it will never happen though… the people with all the money will always stop it from happening…

  9. philipat says:

    I”m with you 100% on this one Barry. But as a lawyer, I’m surprised that you aren’t covering your ar*e by the use of “Alleged” or “Some would say” in your first paragraph. These guys are such slime balls that they might even have the chutzpah to accuse you of libel!!

  10. GeorgeBurnsWasRight says:

    The odds continue to decrease that a jury will convict in any complex business case. The defendant’s lawyers make it so complicated that at least some of the jurors are too confused to convict, plus they eliminate the more intelligent jurors from the pool as much as possible. Finally, if the case is sufficiently complicated they can keep the defendant out during appeals virtually forever, as the current standard seems to be that the trial must be perfect in order for the conviction to stand.

    All this is why prosecutors with limited resources decide to invest their time in simple cases, preferably involving defendants without a lot of expensive lawyers.

  11. phillipat,

    catch a Grip, you’re Smart enough to know that “The Truth” is the ultimate defense against any Libel charge..

    as a matter of Fact, Lawyer that BR is, exhibiting some firm *Thinking, might be ‘inviting’ such a Charge, just to Bury the Accuser(s)..

    w/that, I’d help found the parry..BR, mark me down for U$D 5k, should the Cause arise..(U$D 15k if you’ve set up a 501(c)(3))..

    ‘Holiday’ multiple-choice http://www.thefreedictionary.com/parry

  12. philipat says:

    @MEH

    That’s a cause that I would chip in for as well!!

  13. philipat,

    Right? It’s amazing what a little ‘Weak Sapience’ can get one these Days, no? (;

  14. Rescission says:

    Regulate, regulate, regulate. Now that will show’em! And it will fix all the problems. God forbid we allow the free market to work. We want a planned economy and we want it now!

    As a prior CEO, I would argue that SOX is a disaster, expensive, and in the end will prove not to accomplish what it was intended to accomplish. You guys think a CEO really can sign off on everything? We are going to regulate ourselves into oblivion.

  15. Rescission

    Let me remind you that the last time we tried “Regulate, regulate, regulate” from the 1930s to 1980, it worked pretty well. We avoided systemic risk, and all of our economic problems were just that: problems, none of the end of the world armeggedon variety that required an unprecedented taxpayer funded bailout of the free market losers who blew up their firms.

    Duh.

    We began radical deregulation in the 1980s, and it has led to disaster. Humans need strict rules to govern their behavior when it comes to finance.

    Without strict rules in the banking sector, you end up with precisely what we had: 1) too little capital that was 2) too leveraged up, in order to 3) chase too short term profits, for purely selfish reasons that 4) were in pursuit of excessive bonuses, all of which ultimately 5) destroyed these firms.

    If you have not learned that lesson from the 2000s, then you must not have been paying attention.

  16. philipat says:

    @MEH

    “philipat,

    Right? It’s amazing what a little ‘Weak Sapience’ can get one these Days, no? (;”

    So, as I understand it, you are suggesting that questioning a strategy, whilst supporting its premise is equivalent to “Weak sapince”? :-(

  17. philipat says:

    That is “Sapience”, not as in “Sapiens” of the “Homo” or other variety, or even “Sapince”. Whatever the latter is.

  18. Tarkus says:

    “God forbid we allow the free market to work. ”

    Oh yeah – let’s deregulate more and let the SEC watch porn like Cox and Bush (does that need to be censored?)

    “We want a planned economy and we want it now!”
    Wall St must. That’s why they are so enamored of China (how many trips did Hank Paulson take there as CEO of GS and Treas Sec?).

  19. farmera1 says:

    Come on Rescission, I’m waiting with bated breath for your reply. Hope this exchange gets interesting and informative.

  20. philipat,

    no, not at all, I was referring back to this: “Sapient Judgment Has Weaknesses”-Post, on an earlier Thread..and, more specifically, this: “The Consequences of Weak Sapience”-Part of it..

    http://www.ritholtz.com/blog/2010/09/what-are-the-limits-of-sapient-judgment/#comments

  21. philipat says:

    @Rescission

    “As a prior CEO, I would argue that SOX is a disaster, expensive, and in the end will prove not to accomplish what it was intended to accomplish. You guys think a CEO really can sign off on everything? We are going to regulate ourselves into oblivion.”

    As a retired CEO myself, SarBox sure as hell made me very careful about what I would sign, especially GAAP Acoounts.. Excuse me, but I thought that was the whole point? My compliance meetings with my Management Team and Board were formal and recorded.

  22. philipat says:

    @MEH

    O ;-)

  23. @snapshot

    Thanks for the link. It was a pleasure to print Mr. Farb’s guest post. If you are interested in more of what I’ve said about the ratings agencies, in particular, and the relationship between the Big 4 auditors and the ratings agencies, here’s a few posts.

    http://retheauditors.com/2010/05/19/going-concern-piling-onto-the-scrum-big-4-auditors-want-a-piece-of-the-credit-ratings-action/

    http://retheauditors.com/2008/06/04/rating-agencies-settle-when-will-they-call-cr-on-auditors-too/

    http://retheauditors.com/2008/02/21/the-big-4-and-the-ratings-agencies-a-self-fulfilling-prophecy/

    The term “circle jerk” is apropos.

    fm

  24. canoles says:

    “In other words, the Ratings agencies are being downgraded by the SEC.”
    ~~~~~~~~~~~~~big deal. No one goes to jail for this major fraud, not one person is charged. Not one company loses their corporate charter.