SEC report called “a sham”

By Dean DiSpalatro | October 12, 2011 | Last updated on October 12, 2011
4 min read

The SEC recently released a report summarizing the findings of its examination of the main credit rating agencies, or nationally recognized statistical rating organizations (NRSROs). Despite the laundry list of sometimes eyebrow-raising infractions, the report suggests none of the findings constitute a “material regulatory deficiency.”

In one instance, the report notes that “one of the larger NRSROs”—which means either Standard & Poors, Moody’s or Fitch (the report won’t name names)—failed to follow its own methodology for rating “certain asset-backed securities.”

The report raises concerns about “the extent to which market share and business considerations may have contributed to (1) the rating error and to the delay in discovering, disclosing, and remediating the error; (2) the delay in placing certain asset-backed securities ratings under review; and (3) the resources the NRSRO devotes to surveillance of asset-backed securities ratings.”

Sounds serious, but evidently not serious enough to qualify as a “material regulatory deficiency.”

Belated sham

Bill Singer, contributor on and member at the law firm of Gusrae Kaplan Nusbaum PLLC, doesn’t mince words in his assessment of the SEC’s report.

“My reaction to the SEC’s report is best summed up in one word: hypocrisy.”

Singer says the timing of the report is suspect and appears to be politically influenced because it “curiously comes on the heels of a down-rating of the United States government by S&P, and down-ratings of various U.S. financial service firms by Moody’s and S&P.”

The concerns and the allegations raised in the report are legitimate and most likely correct, according to Singer. “What troubles me is that these are policies and practices that have been ongoing not for weeks or months or even years, but could most likely be measured in the span of generations,” he said.

“Where has the SEC been for the last 20 years? They now come out with what I consider a belated, self-serving report, and somehow say, ‘We smelled smoke but don’t yet see fire.’ I don’t know what anybody would expect somebody in my position, who has been a national critic of regulation, to say other than ‘Give me a break.’ ”

In Singer’s view, the report is symptomatic of a larger problem on Wall Street. “It’s not that Wall Street and Wall Street’s regulators are two separate and distinct entities—to some degree they’ve become conspirators.”

Singer suggests the key problem when it comes to the NRSROs is that two companies—S&P and Moody’s—have essentially monopolized the ratings landscape. “And not only have they monopolized it, they’ve done it in a manner where they were in essence financially benefiting from the very industries and companies they were supposedly independently rating.”

Headless chicken

Singer suggests the SEC is essentially a morally bankrupt, if not corrupt agency.

“I’ve spent 30 years on Wall Street, and every day I’m more and more reminded of Rick’s Café Américain in the movie Casablanca, where Louis shuts down the casino for gambling, and no sooner does he make that announcement than he’s handed his winnings. Is the SEC nothing more than a corrupt police officer named Louis? That’s all it seems to be.”

The SEC lacks the “moral fibre,” Singer suggests, to take on the big rating agencies, adding that with a presidential election coming up, the political will to do so will likely also be lacking.

“Everybody on the Street knew the Commission was going to weasel out of this one. And I know what the Commission’s excuse is. If you call them up today, I can almost guarantee you that what you’ll be told, on or off the record, is the following: we’re overworked, we’re under-funded, Dodd-Frank has put a tremendous burden on us to come up with rulemaking, we only have 3,000 people and we’re doing our best.”

“I don’t buy it. This is an organization that has the effectiveness of a headless chicken—there is no meaningful leadership, there’s no agenda, and nobody has any idea as to what needs to be triaged.”

The American humourist Will Rogers’ famous quip about the Great Depression perfectly captures the state of the SEC, says Singer.

“When asked about the Great Depression, Rogers said, ‘If stupidity got us into this mess, then why can’t it get us out?’ I think the SEC is the living embodiment of an organization that’s trying to prove Will Rogers was correct.”

Dean DiSpalatro