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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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February 18, 2008 12:01 AM ET
Bloomberg
BUSY BODY Securities and Exchange Commission chairman Christopher Cox (with commissioner Paul Atkins) insists the agency is moving swiftly to address market problems.
The SEC's ambitious regulatory agenda, laid out by Mr. Cox this month, includes reforming credit rating agencies and examining suitability requirements for selling complex asset-backed securities, but proposed rules are not expected for at least a few months. Meanwhile, the SEC probe of the securitization of subprime mortgages into collateralized debt obligations, announced last summer, has yielded no official enforcement cases. Mr. Cox, along with other top-level administration officials, has cautioned against quick-fire regulatory or enforcement responses to the worsening credit crisis, noting that the market instead should be left to work it out. But some, including prominent members of Congress, think the SEC has been moving too slowly to bolster investor confidence and fix the accounting and disclosure loopholes that led to the credit crunch. “The idea that the market's going to address this in any short term...the facts don't give you any sense of confidence that's going to be the case,” Sen. Christopher Dodd said last week. The Connecticut Democrat, who chairs the Banking Committee, said he wants a better assessment from the SEC about “who was asleep at the switch” during the events preceding the credit crunch. To be sure, the SEC has displayed signs of action on subprime-related issues. Mr. Cox co-chairs a task force at the International Organization of Securities Commissions that focuses on credit rating agencies, and he sits on the President's Working Group on Financial Markets along with other agency heads. That group is working on medium- and long-term responses to the credit crunch. The SEC also has an internal working group looking at whether bank holding companies and securities firms made proper disclosures in their CDO filings and followed suitability requirements in selling the products. A separate SEC task force is evaluating whether CDOs are valued and accounted for properly, whether capital liquidity levels are adequate and whether credit rating agencies failed to value CDOs properly. SEC staffers also meet monthly with large investment banks to discuss credit risk exposures, according to Erik Sirri, who chairs the SEC's subprime task force. But with an estimated $150 billion in write-downs from investment banks, some think the SEC's focus on the credit freeze has been mostly process and little product. “Can the SEC avoid write-downs by banks? Of course not,” said Joel Seligman, president of the University of Rochester and a board member at the Financial Industry Regulatory Authority. “But I've been hearing at [FINRA] board meetings that regulators said they knew this thing [the credit crisis] was coming six months ago but misgauged the impact.” At a Senate Banking Committee hearing last Thursday, Mr. Dodd said the SEC “needs to help restore investor confidence in the markets by more vigorous enforcement, by more comprehensive regulation of credit rating agencies, and increased accountability and transparency of publicly traded companies.” Top of the list for the SEC has been reforming credit rating agencies, which were blamed for rating CDOs too highly. Raters such as Standard & Poor's and Moody's Investors Service came under the SEC's purview last summer, and have had to comply with new disclosure rules since. The SEC is now looking at loosening the market's—and its own—reliance on credit ratings, as well as pushing for greater disclosure on rating methodologies and conflicts of interest. Although lawmakers are champing at the bit for a rule, Mr. Cox said that the agency first needs a “thorough appreciation” of all the consequences of such a regulatory shift. A final report on credit rating disclosures is due in early summer, though a proposed rule could come before then, Mr. Cox said. The Senate Banking Committee may in the coming months hold another hearing on credit rating agency fee structures and disclosure, at which Mr. Cox would testify. The SEC has also been somewhat hamstrung by its lack of Democratic commissioners since Annette Nazareth left last month. The White House has yet to release the Senate Banking-approved nominees to replace the two Democratic commissioners, and some have speculated the SEC may be unwilling to engage in controversial rule-making with an all-GOP commission. In the meantime, Mr. Cox said he wants to increase competition among credit rating agencies to help foster better disclosure. Last week the SEC granted one-year registration to LACE Financial Corp. to act as a nationally recognized credit rating agency. The SEC said LACE's participation in the asset-backed security rating class could increase competition. Subprime-related enforcement is another area on which some experts say the SEC is dragging. “Right now, the various SEC investigations [into CDOs and subprime lending] seem to be proceeding more slowly than that of the New York attorney general,” said John Coffee, a law professor at Columbia University. “This is the same pattern that we saw in the securities analyst and mutual fund investigations conducted by both [former New York attorney general Eliot] Spitzer and the SEC.” Indeed, Mr. Spitzer, now New York's governor, had harsh words for banking agencies in a Washington Post opinion piece last week. The Bush administration, he wrote, would be judged by history as a “willing accomplice” to the subprime collapse. Mr. Spitzer has sparred with the SEC before, most notably in 2003 over jurisdiction in the market-timing investigation. Although the SEC has more than three dozen subprime-related investigations under way, and is working with banking regulators and the Federal Bureau of Investigation, the commission has not yet determined whether any securities laws were broken in those cases, Mr. Cox said. Separately, the FBI has 16 open cases involving subprime issues. SEC officials have said the probes could lead to enforcement similar to recent accounting settlements, such as the one last week by R&G Financial Corp. In that case, the SEC alleged the Puerto Rican bank holding company overstated its income by $180 million by improperly recognizing gains on mortgage sales and through a series of mortgage-loan swaps with other local financial institutions. Accounting rule changes ushered in by the SEC to contend with bank write-offs have ruffled a few feathers too. The SEC earlier this year issued guidance allowing banks with CDO-related loan modifications to keep the securitized assets off their balance sheets. Last month SEC chief accountant Conrad Hewitt asked the Financial Accounting Standards Board to revisit FAS 140. Investment banks have written off at least $150 billion since the credit crisis, and some hailed the SEC's stance on FAS 140 as a necessary step to prop up lenders. Unions and investor advocacy groups, such as the American Federation of State, County and Municipal Employees, have opposed the SEC's stance on FAS 140, saying it hurts investors and hinders transparency. Sen. Jack Reed last week sent a letter to FASB and the International Accounting Standards Board, saying “lax accounting standards have facilitated financial reporting in which investors fail to receive important information.” He cited the applications of FAS 140 and FIN 46R, in particular, as hiding the magnitude of CDO losses from some investors. The Rhode Island Democrat—who at last week's Banking Committee hearing took the SEC and other regulators to task, saying “the clock is ticking much faster than the market is moving” on the credit crunch—asked the accounting boards to provide information on how structured transactions can be hidden off balance sheet. “Further disruption of the markets caused by a lack of transparency and failure to address some of these issues is unacceptable,” he said. FW
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