White House Whitewash of Ratings Agencies

Way back in one of my earliest blogs, Nov 5 to be exact, I issued a guide to good radio programs on the web that explained the sources of the meltdown in a way that I could understand. A long list of programs, but here's what I said about those rating agencies:

• Are the real culprits the Ratings Agencies (S&P, Moody's, Fitch)? -- I think so, and here's the best explanation! C-Span -House Hearing on Credit Rating Agencies - Henry Waxman (D), Chr. This is a 4-hour hearing, boooring... but if you can navigate to the statement of Sean Egan, Managing Director, Egan-Jones Credit Rating Agency– minute 31:13-39:10 - and again in answer period 44:00-46:05, you will want to start knitting quietly in true Madame DuFarge style! See Hearing.

So, I've been anxiously awaiting the Administration's proposal for regulatory reform to see what they're going to do about these rogue agencies that gave AAA ratings to junky credit default swaps. Last week's Treasury Report outlining the proposals made me think there is no hope, because those ratings guys & their regulators were almost completely let off the hook, except for an Obama-style sermon about how they should go forth and sin no more.

Before I could write a scathing blog piece, however, the Wall Street Journal did it in an editorial that lays out the perfidy of our financial leaders in both the private and public sectors. (WSJ-The Triple-A Punt) Here's a couple of choicest comments from that editorial, which you can read on the web free.

• "Without the ratings agency seal of approval -- required by SEC, Federal Reserve and state regulation for many instituitonal investors -- it would have been nearly impossible to market the structured financial products at the heart of the crisis."
• The Fed's standards for banks "...allowed Wall Street firms to claim that highly-rated mortgage-backed securities on their books were almost as good as cash as a capital standard."
• The treasury's report "..blame[s] the victim. 'Market discipline broke down as investors relied excessively on credit rating agencies'."
• "..the Fed, which until recently would accept as collateral [from banks] only securities that had been rated by S&P, Moody's or Fitch, has lately acknowledged the flaws in this approach."

WSJ wants the government to embrace full reform of the entire ratings system. So do I. It's ironic that the Federal regulators that played the biggest role in causing the ratings debacle -- the Federal Reserve and the SEC -- come out as winners in the reshuffling of regulatory powers under the plan. Only hope now is Congress -- Do you live in Connecticut? Threaten Senator Dodd with further exposure as a patsy (or collaborator) in his role as Banking Chair as he fights for re-election. Live in Mass? Write Barney Frank telling him to find his inner populist! Live in California? Tell Henry Waxman you expect him to walk and chew gum at the same time -- he can reform the agencies while he reforms health care. Here's how to email any member of Congress.