Corporate Governance

Rating Agencies Behaving Badly

By Fei-Lu Qian

This week, the SEC released its much anticipated report on the three major agencies. Among the findings after a ten month investigation, the report concluded that the firms failed to properly manage conflicts of interest and violated their own internal policies in granting top rankings to securities backed by subprime mortgages and other assets. Specifically, the SEC faulted the firms for not shielding ?analysts from e-mails and other communications that discuss fees and revenue from individual issuers.? For example, in one email exchange, an analyst wrote, ?I am trying to ascertain whether we can determine at this point if we will suffer any loss of business of our decision and if so, how much??

Moreover, the SEC blamed the firms for failing to keep memos or minutes of meetings, and for omitting ?certain relevant information? in their committee reports. One analyst in one of the firms referred to the market for collateral debt obligations as a ?monster? and just hoped that they all get ?wealthy and retired by the time this house of cards falters.? SEC Chairman Cox put it this in a news conference discussing the report, ?When there were not enough staff to do the job right, the firms sometimes cut corners.?

If only the SEC had been focused on this issue before that house of cards actually came down.

Full post as published by PomTalk on July 10, 2008 (boomark / email).