A Securities and Exchange Commission plan to spur competition among credit rating agencies after the subprime debacle is drawing fire from industry participants who say it may help bigger firms at the expense of smaller ones… Ann Rutledge, a founding principal of the R&R Consulting firm, agreed that “in the long run, the rule will cause more people to grow.” Others who said that the SEC proposal would stifle rather than spur competition include Joshua Rosner, managing director of the Graham Fisher & Co. investment research firm; Sylvain Raynes, another founding principal of the R&R Consulting firm, and New York University economics professor Lawrence White.– Neil Roland, “Smaller raters cry foul over SEC’s proposed disclosure requirements,” Financial Week, June 27, 2008.
Ann’s comment:
It seems the media are still missing the significance of this provision. The SEC is trying to lead NRSROs back to what they used to do—rate all deals, good and bad—twelve years after the power-seeking U.S. broker-dealer lobby cried foul to the Justice Department and used the “B” word. The claim of blackmail went something like this:
Unsolicited ratings are lower than mandated ones because the agencies don’t have all the facts. They use the threat of a lower rating to blackmail the client into paying.
In truth, ratings often become “unsolicited” when the sellers don’t like them and won’t pay for them. NRSROs used to swallow the cost and publish the unwanted ratings anyway as part of their fiduciary duty to the marketplace. After the DOJ went after Moody’s, unsolicited ratings stopped.
I believe the disclosure provision leads the market towards the desired goal of deregulation in a rather elegant fashion, not right away, but in the long term. Right now good structurers and analysts are in short supply due to the fact that the market does not train and universities don’t teach structured finance. So it is hard for new NRSROs to gain a foothold in structured finance: that’s an economic reality the SEC can’t do much about.
But, the SEC is rising to its responsibility to set the market right by getting the data out into the public domain. (In fact, Neil Rolland’s article quotes comments made at a symposium sponsored by the American Enterprise Institute last week during which the SEC’s Director of Market Regulations highlighted a provision requiring CRAs to share information on ABS.) With full disclosure, those who are motivated to learn can bootstrap themselves; those who have learned what they need can critique others’ deals; and those who do the critiquing do not have to be NRSROs. In effect, the SEC is forcing the whole market to learn about structured finance from scratch (something that should have happened 25 years ago) and creating a competitive environment for quality and professionalism to emerge. I think that’s a great start.
