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America guarantees retribution to rating agencies
Changes in financial laws will allow the US Securities and Exchange Commission (SEC) to pursue rating agencies abroad if their poor decisions impact the United States. Thus, the regulator may resume prosecution of the international agency Moody's, which began back in 2007.The SEC's investigation found that Moody's Europe failed to cut inflated estimates of $1 billion in CPDO bonds out of self-interest. In January 2007, the SEC discovered a systemic failure that resulted in debt being assigned the highest rating of AAA when it should have been rated four notches lower. CPDO (Constant Proportion Debt Obligation) is a debt obligation with a fixed proportion in which the assessment of default risk is based on credit default swap (CDS) indices. After some time, Moody's corrected the error, but in April 2007, the company's division decided not to downgrade CPDO's ratings, given some "unacceptable factors", in particular the damage to Moody's reputation, as well as the potential harm to investors whose investments depend on these ratings.
The division began downgrading CPDO's ratings only in January 2008, citing market conditions rather than its own failures.
Thus, according to the SEC, the agency misled investors around the world. This week, the SEC acknowledged that doubts about "whether these rating decisions are subject to U.S. jurisdiction cause the SEC to abandon its case."
But the commission said yesterday that those concerns are being addressed by the Dodd-Frank Act, which took effect in July. It clarifies the SEC's authority to bring suit for violations that have a significant effect in the United States.
Senate Banking Committee Chairman Christopher Dodd and House Finance Committee Chairman Barney Frank are among the main sponsors of the financial reform bill. In particular, Mr. Frank's proposals include amendments that would give authorities the right to proactively limit the size of financial companies and the diversification of their activities in order to prevent a threat to the stability of the entire financial system.
However, congressmen are less strict with rating agencies than with banks. In June, they decided to remove from the financial regulation bill measures to tighten rules for rating agencies that would have made their work much more difficult. The previous version of the document proposed the creation of a special clearing house to resolve conflicts of interest when determining ratings of structured debt obligations. However, congressmen suggested that instead, studying specific situations with ratings should be carried out by existing regulators. This would allow rating agencies to maintain their existing business model and continue to receive money directly from the companies, municipalities and other issuers they rate. The new proposal would require the SEC to study the idea of regulatory data collection and approve it if regulators believe it is the best way to combat conflicts of interest.
Affiliates of Moody's, McGraw-Hill Cos., Standard & Poor's and Fitch have faced action from Congress and U.S. federal regulators for assigning maximum ratings to U.S. subprime mortgage-backed bonds. As you know, in 2007 these securities collapsed. The ensuing credit crisis resulted in $1.8 trillion in write-offs worldwide.
After this, the agencies faced the wrath of regulators and politicians. In May, the US Attorney's Office said it would examine rating agencies, including the largest. She believes that individual analysts at these companies may have deliberately overrated the securities. “The American public and the entire world were deceived,” House Democrat Paul Kanjorski said of the agencies.
Lately, rating agencies, taught by bitter experience, have been giving the most pessimistic forecasts and boldly downgrading the ratings of weak economies and companies.
Yesterday, the SEC warned rating agencies that it will prosecute them under the Dodd-Frank Act even if they have committed violations in other countries. “Companies must introduce necessary and sufficient internal control over their rating policies, all procedures and methodologies,” the regulator said in a statement.