Throw back the little ones
And pan fry the big ones
Use tact, poise and reason
And gently squeeze them

-Steely Dan, Throw back the Little Ones

 

The WSJ is reporting that the Securities and Exchange Commission has suspended small ratings firm Egan-Jones from issuing any “official ratings” on bonds issued by countries, U.S. states, or local governments. They also were suspended from rating securities backed by mortgages. The ban will last the next 18 months.

The basis of the regulatory punishment was negotiated agreement between the SEC and  Egan-Jones regarding the filing of “inaccurate documents with the regulator in 2008,” mislead investors about their expertise, and violating conflict-of-interest provisions.

No word on when similar conflict of interest charges are coming for Standard & Poor’s Ratings Services or  Moody’s Investors Service for similar misleading, conflicted and otherwise compromised ratings.

The major credit rating agencies were the prime enablers of the credit crisis. They put Triple-AAA ratings on securitized sub-prime mortgage bundles, primarily because they were paid by the underwriters to do so. But for those actions, much of the securitized junk would not have been able to be purchased by the many bond funds, pensions and other large institutional investors mandated to buy only Investment grade paper. (The bond markets eventually figured this out and has learned to ignore the ratings agencies commentary as conflicted and corrupt). Thus, what should have been a tiny,  high risk corner of the mortgage market instead became an enormous, A-rated, mainstream asset class for yield hungry fixed income managers. This is why S&P and Moody’s are thus amongst the prime causes of the financial crisis of 2008-09.

It is a damned shame the SEC has to to figure this out and act on it . . . .

 

 

Previously:
Ratings Agencies Still Broken (May 24th, 2010)

Surprise! Ratings Agencies Still Suck! (January 5th, 2011)

Source:
SEC Reins In Ratings Firm
By JEANNETTE NEUMANN
WSJ, January 22, 2013   
http://online.wsj.com/article/SB10001424127887324624404578257850769793788.html

Category: Analysts, Bailouts, Credit, 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.

21 Responses to “SEC Bans Wrong Ratings Agency”

  1. Been Around 1963 says:

    The SEC punished Egan Jones for not putting its ratings online (something the SEC never noticed during the application process?), but this misses the bigger point. Unlike the big three, Egan Jones’ business model gets revenues from subscribers, not issuers, so the firm needs to control disclosure of its work product.

    It sure looks like the SEC wants to stifle competition in order to protect the franchises of Moody’s, S&P and Fitch.

  2. BITFU Search Engine says:

    I’m surprised Egan-Jones didn’t employ some lame Free-Speech defense as S&P and Moodys are wont to do.

    We need an Oliver Wendell Holmes to step up and issue a ruling about the illegality of shouting “THERE IS No FIRE!” in a crowded theater that’s engulfed in flames.

  3. Seaton says:

    Cui Bono—it’s too obvious the foxes are in charge of the henhouse. For the rest of us, Caveat Emptor

  4. A says:

    An excellent update by Frontline (though not focused on ratings agencies):

    http://www.pbs.org/wgbh/pages/frontline/untouchables/

    Very re-assuring to know none of key players (criminals) will ever visit the slammer.

    ~~~

    BR: Already posted here. I found it hard to watch without wanting to go postal on these eejits

  5. AHodge says:

    nice title
    i already detonated on this yesterday
    maybe you have legal issues attacking khuzami personally
    but i dont
    he clearly personally led all the Egan attacks
    is now the lowest most abusive US financial official i can think of–ever– for trampling on anyones rights
    i still have a legal question
    the SEC has the right to accredit and approve rating agencies
    and those ratings are apparently required for some pension funds etc to invest
    but can the SEC forbid Egan Jones from any selling these opinions for money?
    even if the customers are willing to pay?
    this is a different free speech?
    or free selling opinions for money issue
    than the usual thing discussed for the agencies,
    namely are they free speech protected to give really wrong great ratings
    for free
    about their paying clients

    if khuzami gets away with this second different attack, it will not only wound or kill egan jones
    but the entire user pays rating agencies model.
    we will only be allowed to have the rated company pays for it if he likes it model
    –beautiful just f…ing beautiful

  6. DeDude says:

    Rating agencies are one of the biggest payola scams on Wall Street. Allowing or outright mandating certain funds to base their “safe” investments on these payola ratings is a crime. If you want to restrict risk in a large fund you simply have to demand that the fund purchase credit default protection in an open market and from institutions that have the financial backing to pay out when needed. A good beginning would be to demand that rating agencies offer credit default insurance at a price corresponding to their ratings. Let them put their money where their mouth is.

  7. carleric says:

    Is the SEC the most compromised, bought and paid for agency around or does it just seem that way? I would guess Moody’s S&P and Fitch consider them cheap at twice the price.

  8. Frilton Miedman says:

    Most infuriating about this, if memory serves, Eagan-Jones was the only ratings co that openly warned About CDO’s prior to the ’08 bust….this looks more like they’re being penalized for not being a “team player”.

    As completely distasteful as I find a whacko like Alex Jones, it continues to look more and more like he’s not making stuff up.

  9. Drews88 says:

    Dear Mr. Buffet: What an Investor Learns 1,269 Miles Away from Wall Street by Janet Tavakoli – A great book on this topic

  10. Petey Wheatstraw says:

    “No word on when similar conflict of interest charges are coming for Standard & Poor’s Ratings Services or Moody’s Investors Service for similar misleading, conflicted and otherwise compromised ratings.”
    ______________________

    Do you think they will indict the entire industry when doing so would expose they, themselves as being incompetent and/or, worse still, complicit, in the criminal charade?

    Standard & Poor’s and Moody’s are well known names, even to those outside the Ratings Agency ‘industry’. Egan-Jones, not so much.

    Once again, the minnows are held up as the catch of the day, while the sharks continue to swim freely amidst the carnage and blood of their victims.

    Mid-level managers of mid-level companies were solely responsible for the financial collapse.

    Hoodathunkit?

  11. AtlasRocked says:

    Why isn’t Obama being held culpable in all this? What happened to holding the top dog accountable, like Bush was excoriated, rightfully, for deregulation? Why Bush the puppet of bankers, and Obama: the victim?

    Does the perverting influence of money only work one way? From the people to the politicians? Citizens and corporations giving $6 billion horribly influence the gov’t, But If the politicians give 1000X that amount to the people, every 4 years, and they are doing it with money we don’t have, then that cannot be questioned as the most highly visible sign of bad money in government? Really?

    The SEC is spanking EJ for downgrading their plans, and none of the populace cares about holding Obama accountable for this political act of treachery. Doesn’t anyone have a slightest suggesting the gov’t handouts are perverting the population to accept worse and worse regulation in favor of more and more benefits, and continued, too-low, taxes?

    ~~~

    BR: Your 1st paragraph describes what I called “The Tragedy of the Obama Administration

    (The rest of you comment is your usual blahblahblah we all have become inured to).

  12. Petey Wheatstraw says:

    Obama is right of center and corporatist git — just like the vast majority of our elected officials.

    His feet are not being held to the fire because he or one of his brethren would have to do it himself/themselves, and that goes against nature and/or the nature of tribalism.

    Bush gets the blame because his was the administration that demonstrated that the oligarchy was, no matter the crime, above the rule of law, and because they drove us past the point of no return regarding our legitimate Constitutional Republic.

    Bushco established that the Rule of Man came before the Rule of Law.

    It’s unrealistic to think that once a milestone on the path of criminality or malfeasance in government has been passed, than ANY holder of office would willingly go back to the legitimate way of doing things.

    The Republicans were shortsighted in their zeal for things such as the Unitary Executive theory, for example. Did they really believe that a (D) President would be constrained from applying that theory after they set the precedent?

  13. Joe Friday says:

    Let us not forget their fellow weasels over at the Fitch ratings agency.

  14. Frilton Miedman says:

    AtlasRocked Says:
    January 23rd, 2013 at 12:22 pm
    “Why isn’t Obama being held culpable in all this? What happened to holding the top dog accountable, like Bush…”

    ~~~

    Hell, here’s a bone for the Ayn Rand sci-fi readers out there, if there’s any president who should be held to account, let’s look at who signed the CFMA & Gramm-Leach_Bliley that made it all possible – Clinton.

    This way, we can keep it all about “Your side sucks and mine doesn’t” and completely avoid the fact that our government has a government.

    Just a friendly reminder of what the Constitution says –

    “The President, Vice President and all civil Officers of the United States, shall be removed from Office on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.”

    It appears that taking money or favors in exchange for personal gain is unconstitutinal.

    Meanwhile, your crowd loves lecturing the public about the Constitution, Liberty, and free markets.

    Awesome.

  15. AtlasRocked says:

    FM – if you can find where W, Clinton, Bush, Reagan …..Washington…. were handed a report DOCUMENTING trillions of dollar of crime in the fiscal or any other sector, please point us to the investigation, the document, and the evidence they did not prosecute. That’s unique, as far as I can find.

    Even something 1/100 as big would be interesting. It’s OK to normalize it to GDP, “trillions of crime” (reported by the 60 Minutes interview of the investigator) is, say, 10% of the GDP of criminal behavior.

    If this is business as usual, show us the data to support your assertion, this is a data-driven forum, not “my opinion is right because I say it is”. Unique is unique until proven similar to prior President XXXX. I’ve been doing research and can’t find anything similar from any president: Obama is unique in decriminalization a huge pile of crime, crime his OWN PARTY investigated and brought to him, he wasn’t rejecting a demand by an opposing party, which makes it even more worrisome .

    Between the FCIC dereliction of law enforcement duty, and fine-n-release behavior well documented by Barry, to me this meets the objective definition of massively corrupt, and urgently impeachable.

    FYI – Myself and many other conservatives quit the Republican party in 2004, and all of us realize Bush was complicit in deregulation. Clinton too. I voted libertarian in 04 and 08.

  16. Frilton Miedman says:

    AtlasRocked Says:
    January 23rd, 2013 at 8:30 pm
    ” Between the FCIC dereliction of law enforcement duty, and fine-n-release behavior well documented by Barry, to me this meets the objective definition of massively corrupt, and urgently impeachable. ”

    ~~~

    Get money & nepotism out of politics, respect the Constitution’s prohibition of bribery – problem solved,

    Politicians have no incentive beyond voter approval as was intended.

    As for impeachment, sorry chum, the GOP blew it, after four years of listening to ridiculous accusations of Socialism and government takeovers for trying to protect the small guy and massive time wasted going on about birth certificates – no one cares anymore, that boy has cried a lotta wolf.

    ***
    AtlasRocked Says:
    January 23rd, 2013 at 8:30 pm
    “FYI – Myself and many other conservatives quit the Republican party in 2004, and all of us realize Bush was complicit in deregulation. Clinton too. I voted libertarian in 04 and 08.”

    ~~~

    To vote Libertarian, you have to know what a Libertarian is.

    There is a HUGE difference between Ayn Rand and Milton Friedman.

    Austrians stupidly think there’s no such thing as a threat from monopoly or concentrated power – therefore no need for government, that any sign of the organized will of people is Communism.

    Friedman’s beliefs revolved around the protection of personal freedom from the tyranny of concentrated power, not just government (the more common), but any concentration of power.

    Your crowd leaves us the worst of both worlds, less government to defend against concentrated power/tyranny, while leaving the now reduced government to fight like dogs for table scraps from their corporate overlords who make or break their careers.

    Yes, I fault Obama for not doing enough against the crimes committed by the TBTF’s, but really….was I going to vote for Mitt “corporations are people my friend” Romney to do it better?…really?

    The only decent candidate the GOP had was Buddy Roemer, and he didn’t get invited to a single debate.

  17. AtlasRocked says:

    I can’t say what romney would do, but the republicans, the party of “big money” put 1000 crooks in jail after the S&L crisis. Google Bill Black and read up on it.

    I happened to think MOST bankers dont’ want crime or fraud in their industry. They want law and order and enforcement. I know 3 bankers who all feel that way. None of the want fraud in their industry. They all believe Obama has been terrible for them. Awful. I don’t know anybody that enjoys crime in their industry, actually. I do question them “why isn’t the industry members like you speaking out?”

    They are all conservative republicans. Don’t know any liberal bankers.

    ~~~

    BR: We are very familiar with Bill Black — he is a regular contributor to the ThinkTank

    As to GOP bankers, let me remind you that Reagan could not get nominated today, and Nixon would be thought of as too Liberal.
    (I have noted repeatedly Obama is no better)

  18. AtlasRocked says:

    but i bet the liberal bankers want their industry crime free too.

  19. AtlasRocked says:

    My theory is that Obama wanted to be known a “social reformer” (puking sounds heard) more than a “bank reformer”.

    He knew that if he focused on reforming banks, the economy would surely stall, and his constituency’s agenda never would happen. With the crisis fresh on the minds of the rich, his party passed toothless laws (Dodd-franks), left Glass Steagal off the agenda (this would have been a great re-enactment, I think most of us would cheer this), and left the crooks guarding our money and property, and regulating said same.

    He is actually fine with crooks in the banks, it is typical for liberal to believe the banks are all crooked anyway, and leaving them there just confirms their assertion. History now documents tons of crime in the fiscal sector with the FCIC, and everyone can now say this with certainty.

    Why are both parties rather quiet? Well, the democrats aren’t going to whine while the social agenda moves forward, right? And the republicans? He’d just prosecute all the republican leaning banks and real estate culprits selectively, as he now show he will do with Egan Jones.

    A chief of police with unprosecuted “goods” on a bunch of opponents is a powerful coercive weapon.

  20. Frilton Miedman says:

    AtlasRocked Says:
    January 24th, 2013 at 7:36 am
    ” I can’t say what romney would do, but the republicans, the party of “big money” put 1000 crooks in jail after the S&L crisis. Google Bill Black and read up on it. ”

    ~~~

    Hilarious, one more example of neo-cons taking credit for Reagan era paleo-cons, as the neo-cons call them – “RINO’s”, or laying claim to promoting Reagan policies.

    Meanwhile, Reagan ERA Republicans are furious over Neo-Con bullsh~t, Regan oppoed a lower cap gains tax, he opposed allowing gun sales without background checks & fought the NRA, he raised taxes 12 times when it became apparent his tax cuts went too far.

    Here’s Reaganomics founder, Paul Craig Roberts, on the topic –

    “The United States and the welfare of its 300 million people cannot be restored unless the neocons, Wall Street, the corporations, and their servile slaves in Congress and the White House can be defeated.”

    ************

    AtlasRocked Says:
    January 24th, 2013 at 7:36 am
    “I happened to think MOST bankers dont’ want crime or fraud in their industry.”

    ~~~

    Yeah, so did a lot of us, and then we learned the truth in 2008 and watched in horror as the banking lobby verified our fears for the next four years fighting tooth and nail to overthrow Dodd-Frank and CFTC position limits.

    If adhering to the rule of law equates to a pay cut of $10 million a year for me as a bank CEO, I’ll just pay off Congress in “campaign bucks” to rewrite the law, therefore I’m no criminal, what I do is no longer fraud.

    As Romney said when asked about paying less than a working single mom “I pay what the law says I should pay.” –

    Not 4 years earlier he lobbied against Chuck Grassely’s (R) attempts to increase cap gains taxes and won.

    Atlas, you might vote “Libertarian”, but trust me, if you’re an Atlas shrugged/Ayn Rand sci-fi fan, you’re no Libertarian, not at all.

  21. Egan-Jones Treasury bond rating fell to AA in 2011. As the Federal Gov’t moves towards a $2.0 trillion Deficit and $29 trillion Debt by 2023, some real ugly metrics are going to come to fruition. The USA will face incremental downgrades (to A, BBB, BB, B & ultimately CCC in 2025) at definitive thresholds. Shawn Egan was going to be at the forefront of this playing out. Another very sad day in the ongoing corruption in America…

    Debt Wall chart: http://trendlines.ca/free/economics/DebtWallUSA/DebtWallUSA.htm