SEC Slaps Hands of Moody's, S&P, Fitch, But Sidesteps Real Change

The SEC is slapping the hands of credit ratings agencies whose lax performance is said to have contributed mightily to the financial meltdown.

While avoiding more significant regulatory changes for later, the SEC will prohibit ratings agencies from rating products they helped structure, require more detailed reports of their performance and complaints and make it illegal for ratings agency employees to accept gifts of more than $25 from securities issuers.

But the SEC stopped well short of truly meaningful regulation, such as that for structured products such as mortgage-based collateralized debt obligations (CDOs) and various other mortgage and coporate debt-based instruments. Ratings agencies, especially the Moody’s Corp., Standard & Poor’s and Fitch Ratings, came under intense attack during congressional recent hearings when it was found that they gave cheerful ratings to dubious debt and then were slow to downgrade it in time to protect investors.

According to testimony, an S&P rater said that if “cows” put together a product S&P would rate it.

It could well be that the tough stuff may come after the Bush Admininstration’s SEC chairman Christopher Cox leaves office in February. To be sure, the SEC has only been charged with overseeing ratings agencies for two years.

But the lame duck SEC clearly dodged issues when it made the changes Dec. 3. Bowing to the Big Three, the SEC decided against pressing forward with a requirement that would have made them make their ratings public. Instead, the ratings agencies have to disclose a “random sampling” of 10 percent credit ratings six months after they were issued.

And who gets to choose which will be included in this “random sampling?” The ratings agencies of course. It’s more evidence of the “self-regulation” nonsense that has embraced the Bush years.

Regulators in other countries are trying to clean up their credit ratings agenices, too. In Australia, regulators are moving to make sure conflict of interest rules are followed and have adequate and competent staff. Proposals to license agencies are also under consideration.