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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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June 30, 2008 11:47 AM ET
Bloomberg
Sean Egan, president of Egan-Jones Rating Co
The proposal, unveiled June 11, would impose disclosure requirements on rating agencies hired to grade structured assets such as mortgage-backed securities and collateralized debt obligations that were at the heart of the housing credit crunch. Firms would have to disclose details about the assets underlying the securities and give competitors a chance to offer unsolicited ratings. The rating agencies would also have to make their grades public so investors could compare each firm’s performance. SEC officials said investors could use the unsolicited ratings to assess the original grade, giving smaller firms a chance to establish a track record and increase their market share. “This does us more harm than good,” said Sean Egan, president of Egan-Jones Rating Co., a small firm that downgraded Enron and WorldCom before larger rating agencies did. “Why punish us?” Mr. Egan said in an interview that under the SEC plan, investors would have little incentive to buy his firm’s ratings and research if Egan-Jones had to disclose its grades and its underlying data about structured assets. Egan-Jones, unlike the large rating agencies, is paid for its grades by investors rather than by the issuers of securities being rated. The firm has drawn praise for its unique business model from critics who say that the standard industry model is rife with conflicts of interest. “The irony is that we’ll now be faced with a diminution of value to our clients and higher administrative costs,” he said. Alex Pollock, a resident fellow at the American Enterprise Institute, agreed. There seems to be a “fundamental conflict” in what the SEC says it wants and what its proposal will do, said Pollock, who has testified before Congress on the subject. The SEC is trying to comply with a 2006 law that seeks to foster competition, accountability and transparency in the credit rating industry. Three rating agencies—Moody’s, Standard & Poor’s, and Fitch Ratings—dominate the industry and in fact are the only firms that rate structured assets. Seven smaller agencies, including Egan-Jones, are also recognized by the SEC. The SEC plan has prominent defenders, such as Columbia University law professor John Coffee, who contends it will foster competition by opening up data about structured loans to rating agencies and investors such as pension funds and insurance companies. Mr. Coffee, who has testified before Congress on the subject, said in an interview that the plan “will create a more level playing field,” much as Regulation FD has done for stock analysts. Regulation FD requires companies to disclose market-moving information to everyone at the same time, rather than just to favored analysts. Mr. Coffee didn’t think Egan-Jones would be adversely affected, saying “investors will use the firm as a watchdog and not be concerned that their information is not unique.” 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. The conflicting views set the stage for the SEC under chairman Christopher Cox to review all the public comment letters due July 25 and make refinements before deciding whether to give the plan final approval. The SEC has been under pressure from Congress to act after large rating agencies gave AAA grades to pools of subprime mortgages rolled into securities before the housing market collapsed. The proposal also aims to stem conflicts of interest by prohibiting rating agencies from structuring the same products they grade and barring anyone who participates in determining a rating from negotiating the fee charged to the issuer. Firms also would have to publish performance statistics for one, three and 10 years within each rating category, and disclose the way they rely on the due diligence of others to verify the assets underlying a structured product.
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