On Egan-Jones
January 23, 2013 3 Comments
Notice that the easy-to-make-fun-of action of the SEC against the rating agency Egan-Jones wouldn’t have been possible to begin with, if: Egan-Jones hadn’t had to ‘register’ with the SEC in the first place, because Egan-Jones weren’t an NRSRO, because there were no such things as ‘NRSROs’, because the government didn’t ‘recognize’ statistical rating agencies to begin with, because that’s as stupid as having the government ‘recognize’ movie critics and use their reviews for official things.
I used to work in the legal/compliance department of a large mutual fund company. IIRC (and I didn’t work in this particular information area, so please forgive if I’m mistaken), not only did rating firms have to “register” with the SEC, but aren’t/weren’t the various types of mutual funds required to invest only in certain not-lower-than levels of NRSRO-rated securities (and I think they had to be rated by two NRSROs at/above the permitted level)?
And, again IIRC, Rule 2a-7 laid out very specifically what level of NRSRO-rated securities money market funds were allowed to invest in. Or something like that — it’s been a while.
That’s where the whole issue of the various tranches of securitized mortgages got messed up, isn’t it? No one ever went back and re-examined and re-rated those conglomerations of slices of mortgages?
I believe mutual funds will have criteria in their prospectus dictating what they can/can’t buy, yes. The actual rules (probably? guessing) vary from one fund to another and so don’t nec. come from anything like SEC 2a-7 per se, but the effect is the same – a clockwork reliance on NRSROs for investment decisions.
Re: MBS, yes the rating agencies rerated (downgraded) all those tranches, but of course it was mostly too late. Nowadays they rate them but with supposedly improved criteria/models and a tag differentiating such a rating from corporate ratings e.g. putting “(sf)” for “structured finance” after the rating.
If/where relying on ratings is a private, free-market decision I can really not complain about it. Investors can use whatever criteria they want, no skin off my nose. But for those cases the response to ‘rating agencies did a bad job pre-2007′ should have been: ‘okay, we’re not going to use ratings anymore’ – not endless whining about rating agencies or trying to regulate them more. If you buy a car on your brother-in-law’s advice and it turns out to be a lemon, stop listening to your brother-in-law. IMHO, of course.
Yah, thx for taking the time to expand on that (expound?)
2a-7 relates only to MMFs, I know, and other types of mutual funds designate & disclose their own particular mix of investments in the prospectus & statement of information. …which are probably the least-read documents ever (except for PPACA.)