TEXT OF INTERVIEW
Kai Ryssdal: One of the other big bank regulators in this country besides the Fed had something to say today, too. Christopher Cox is the chairman of the Securities and Exchange Commission. Today, the SEC released its report on credit rating agencies and their role in the subprime mess.
Moody’s, Standard & Poor’s, and Fitch are the big ones you’ve heard of. There are ten of them in all, though, and they’ve been criticized harshly for giving top ratings to some of the complicated mortgage-backed securities that tanked after the housing bust.
The report Cox made public today spells out just how bad things were at those rating agencies.
Marketplace’s Amy Scott’s covers the story for us.
Amy Scott: Hey Kai.
Ryssdal: Alright, so exactly how bad was it? What did we learn?
Scott: Well, this is the SEC’s first annual report on the credit rating agencies since Congress gave it express oversight in 2006 and a couple of things stood out to me. One was that the report describes just the sheer volume of these complicated deals that these agencies were rating. There was an explosion in both the number and complexity of residential mortgage-backed securities and CDOs — those collateralized debt obligations we’ve talked about — that the agencies appeared to struggle just to handle the volume. In one email that’s quoted in the report, analysts were concerned about whether they should be rating one of these deals and one said that the firm’s model for rating the bond didn’t capture half of the deal’s risk but that it could be structured by cows and we would rate it.
Scott: The report also finds that the rating agencies failed to disclose significant aspects of the ratings process, they failed to adequately monitor the ratings after they’d been issued — you know, to make sure a Triple-A was still really a Triple-A — and some of the most interesting reading in this report concerns conflicts of interest. You know, the companies that issue these bonds pay the agencies to have them rated and some of these internal emails suggest that analysts were well aware of the agency’s need to win that rating business and the problem with that is there’s an incentive to give a higher rating than the security might have deserved.
Ryssdal: Sure. The SEC has already proposed a bunch of new rules to address some of thse complaints. Are we going to get anything new coming out of this report specifically?
Scott: Right. Well, last month, you and I talked about this. The comission came out with several proposed reforms that say things like analysts shouldn’t help structure the same deals that they rate, they can’t accept gifts from issuers worth more than 25 bucks. Also, there are rules designed to reduce Wall Street’s reliance on credit ratings. This new report makes additional suggestions for the firms, but really, it’s probably just going to provide additional fodder for the discussion as the SEC considers enacting the rules it proposed.
Ryssdal: Last question, Amy, before I let you go; a topic that I’m sure is on the minds of many: Anybody going to jail over this whole thing?
Scott: Well, the SEC doesn’t exactly send people to jail. It does have an enforcement division that could take action if they find fraud. Chairman Cox did say today that when the SEC finds evidence of wrongdoing, it persues it vigorously, but one securities law professor I spoke to said that the tone of this report didn’t really suggest that we’ll be seeing any of that.
Ryssdal: Alright, a big day for securities regulation. Our brand new New York bureau chief Amy Scott in New York for us. Thank you Amy.
Scott: Thanks Kai.
As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.
Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.
Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.