SEC’s New Rules Don’t Curb Ratings Inflation!
If you expected the latest SEC reforms to curb rating agency inflation think again. According to this article from Wharton, recent efforts at the SEC are unlikely to change the global long term trends towards ratings dependency (and thus inflation). Of course prudent value investors would never rely on rating agencies to uncover hidden risks. Click Here To Skip The Introduction & Read The Full Article On Rating Inflation And The New SEC Rules
Article Introduction (Via Knowledge @ Wharton)
On December 3 the Securities and Exchange Commission approved tighter regulations on the credit rating agencies, hoping curbs on conflicts of interest will prevent the kind of ratings-grade inflation that played such a key role in the credit crisis. The SEC voted to require greater disclosure and to ban agencies from rating securities they have helped issuers create.
While the ratings firms applauded the moves, reform advocates were disappointed. The changes fell far short of remedies initially proposed by the SEC in June and supported in a December 1 statement by the Financial Economists Roundtable, a 15-year-old group of top economists from around the world that meets every year to tackle economic issues. By omitting two critical elements of the June proposal, the SEC pulled the teeth that would have made the regulations effective, according to the FER.
Article Excerpts (Via Knowledge @ Wharton)
“Wall Street and the ratings firms had opposed many of the stronger provisions as too inhibiting. SEC Chairman Christopher Cox said the agency would continue to study ideas like special ratings treatment for volatile securities and reducing use of ratings in regulations.”
“One problem with the current system, according to Blume: Investors have become overly reliant on ratings, using them as a substitute for their own analysis.”
“Blume, Herring and the FER statement all express concerns that use of ratings in regulations is on the rise in many countries. The European Union, for instance, uses ratings in capital requirements, while ratings are incorporated into the Basel II international banking guidelines. “It really does bias the system toward ratings inflation,” Herring said, “and it’s getting more and more widespread and more and more pernicious.”
Click Here To Read The Full Article On Rating Inflation And The New SEC Rules
