A cattle market?

If there's one thing America is very good at, it's coming down on white-collar crime. Enron, MCI WorldCom, Martha Stewart - they've all faced the wrath of the law. Last month, it was the turn of the credit rating agencies. While it would be incorrect to suggest that they've done anything criminal, that hasn't meant they've escaped the scrutiny of the law enforcers.

First up - New York Attorney General Andrew Cuomo. Cuomo is the new Elliot Spitzer - the New York governor who resigned in March because of his involvement with a high-priced prostitution ring, but who formerly found glory as an attorney general bringing the excesses of Wall Street to account. Cuomo's mandate is much the same, except this time it's about subprime.

Spitzer exposed the nefarious investment banking activity of spicing up stock research reports to sell services. Cuomo has been investigating the conflict of interest issue that has been raised because rating agencies receive fees for their services. He's struck a deal with the three major international rating agencies which stops the practice of 'ratings shopping', where it was alleged that ratings agencies benefited from relaxing their standards in order to attract business (see page 22-25).

The Securities and Exchange Commission (SEC) has also turned its spotlight on the agencies. In July, it issued a report following a ten-month review of rating agency practices which found that the firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds (see News in Brief, page 5). During the review, the SEC had access to over two million emails and internal communications at the firms. Some of the content defies belief.

"Let's hope we are all wealthy and retired by the time this house of cards falters," one analyst wrote to a colleague.

"I am trying to ascertain whether we can determine at this point if we will suffer any loss of business because of our decision and if so how much," said a 2004 email sent by one analyst to a senior business manager.

In another internal communication, two analysts at a rating company discussed whether they should grade an offering. "One analyst expressed concern that her firm's model did not capture 'half' of the deal's risk, but that 'it could be structured by cows and we would rate it'," the SEC said.

S&P and Moody's have responded with promises of process improvement and reform, while Fitch reportedly says it hasn't been informed of "any finding" that is "inconsistent" with the company's code of conduct.

Now the SEC and lawmakers are turning their attention to the question of enforcement, though it is still unclear what shape, if any, that might take.

William Rhode, editor.