The Exchange

SEC Gets Its (Little) Man

Here's a little recommended reading, especially if you remain enraged by the lack of significant changes in the financial system following the 2008 meltdown or you become apoplectic when you hear the names Moody's, Standard & Poor's and Fitch.

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In a new piece called SEC Keeps Ratings Game Rigged, Jesse Eisinger at ProPublica looks at how and why the Securities and Exchange Commission is going after the small ratings firm Egan-Jones for not, he says, nearly bringing the entire capitalist system to its end, but for essentially what amounts to a paperwork error.

Here's the summary. In 2008, Egan-Jones applied to be deemed a "nationally recognized statistical ratings organization," the same as its larger competitors. In response, the SEC found some deficiencies in its filing, noting that "Egan-Jones represented in its application that it had 150 ratings on asset-backed securities and 50 ratings on governments, when it hadn't issued any at the time," Eisinger writes. Additionally, the agency contended "that two Egan-Jones employees had a role in rating issuers while owning securities in those issuers. The firm says these employees had long-standing investments and that it actually brought these violations to the attention" of the SEC.

Now, the ProPublica piece points out that Egan-Jones is paid by users who want access to its ratings. In contrast, Moody's, S&P and Fitch are compensated by the debt issuers whose securities are getting the ratings -- a very different arrangement and the basis of a longstanding critique of the firms by those who question their usefulness or ability to provide truly objective analysis.

While pointing out that "Egan-Jones's ratings didn't cripple the global economy," Eisinger also writes that one might be forgiven for viewing this as a case of regulators allowing Moody's and S&P to "walk free while pursuing [Egan-Jones] on minor technicalities."

Be sure to check out the full piece. Then let us know what you think. Is the analysis right on? Do you have any sympathy for Egan-Jones, or are you glad to see the agency doing something, anything?

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