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Waiting for the light

The SEC approved additional rules for credit rating agencies yesterday.

This follows on numerous rulemakings over the past several years…

Kudos to the Commission and staff for their effort to shape rules for this space.

Credit rating agencies lie at the nexus of credit markets. Their “opinions” determine pricing and credit availability  for all rated entities.

Central to the credit space allocating capital efficiently is the transparency of information and competition among raters. The new rules move us closer towards that goal.

One glaring problem remains. This is the need for corporate obligors to share offering information in an equivalent manner to all credit rating agencies. The new rules require this for structured finance products and I commend the Commission for this effort. But large, systemically important financial firms are still able to shop for ratings and obscure the true creditworthiness of their debt.

Here are comments that I made to Congress on the issue in April. I raised the question of the investment grade ratings of Lehman Brothers, Bear Stearns and AIG at the time of their failures. The new rules adopted by the SEC yesterday will not correct this problem.

The truth of the situation is that institutional investors will rely on CDS spreads when evaluating the debt of financial firms but retail investors (dumb money) will be left relying on conflicted, “shopped” ratings. The Commission cannot let this stand. This is the essence of asymmetric information and “two-tiered markets”

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From the Commission’s work yesterday:

Rules and Forms at Issue in Removal of References to NRSRO Credit Ratings

The Commission has adopted some amendments and is considering other amendments that would eliminate references to NRSRO credit ratings in certain SEC rules and forms.

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And in California Reuters reports that:

“California Attorney General Jerry Brown issued subpoenas on Thursday to Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings as he launched an investigation of whether they broke state law with the ratings they provided mortgage-backed securities…

…[State AG Jerry] Brown’s probe was applauded in California State Treasurer Bill Lockyer’s office, which has been a harsh critic of credit rating agencies and has been pressing them to grade corporate debt and less risky municipal debt by the same standards.

“The state of California along with other municipal issuers are all too familiar with wildly inaccurate ratings from the agencies,” Lockyer spokesman Tom Dresslar said. “The ratings do not come close to reflecting the risk of default, which in our case is nil.”

“It’s clear that the rating agencies played a significant role in the downfall of the U.S. economy,” Dresslar said.

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James Gellert of Rapid Ratings talks to Bloomberg about the new rules… James is evidence that competition will soon be igniting this space… go men… light up the sky… open this dark market…