The SEC has found smoking guns for conflict of interest at the CRAs:
The SEC report describes an e-mail in which an analyst refers to the market for collateralized debt obligations as a “monster.”
“Let’s hope we are all wealthy and retired by the time this house of cards falters,” said the e-mail, which was sent Dec. 15, 2006, to another analyst at the same firm.
…
“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 e-mail an analyst sent to a senior business manager. The SEC said it found no evidence such considerations affected “rating methodology or models.”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.
It’s hard to tell how seriously to take this report. What kind of reply was received by the analyst who asked about loss of business? Was he told it was none of his business? Was he ripped a new one? Was he told he’d damn well better rate the puppy triple-A? The full press release is available as is the full report, with the following “remedial action” notes:
- The Staff has recommended that each examined NRSRO evaluate, both at this time and on a periodic basis, whether it has sufficient staff and resources to manage its volume of business and meet its obligations under the Section 15E of the Exchange Act and the rules applicable to NRSROs. Each examined NRSRO stated that it will implement the Staff’s recommendation.
- The Staff has recommended that each NRSRO examined conduct a review of its current disclosures relating to processes and methodologies for rating RMBS and CDOs to assess whether it is fully disclosing its ratings methodologies in compliance with Section 15E of the Exchange Act and the rules applicable to NRSROs. Further, the Staff has recommended that each NRSRO examined review whether its policies governing the timing of disclosure of a significant change to a process or methodology are reasonably designed to comply with these requirements. Each examined NRSRO stated that it will implement the Staff’s recommendations.
- The Staff has recommended that each NRSRO examined conduct a review to determine whether its written policies and procedures used to determine credit ratings for RMBS and CDOs are fully documented in accordance with the requirements of Rule 17g-2. Each examined NRSRO stated that it will implement the Staff’s recommendation.
- The Staff has recommended that each NRSRO examined conduct a review of its current policies and practices for documenting the credit ratings process and the identities of RMBS and CDO ratings analysts and committee members to review whether they are reasonably designed to ensure compliance with Rule 17g-2 and to address weaknesses in the policies or in adherence to existing policies that result in gaps in documentation of significant steps and participants in the credit ratings process. Each examined NRSRO stated that it will implement the Staff’s recommendations.
- The Staff has recommended that each NRSRO examined conduct a review to determine if adequate resources are devoted to surveillance of outstanding RMBS and CDO ratings. This review should include, for example, whether the rating agency maintains adequate staffing and has adequate expertise dedicated to performing ongoing surveillance. The Staff has also recommended that the NRSROs ensure that they have comprehensive written surveillance procedures. Finally, the Staff has recommended that all appropriate surveillance records be maintained. Each examined NRSRO stated that it will implement the Staff’s recommendations.
- The Staff recommended that each NRSRO examined review its practices, policies and procedures for mitigating and managing the “issuer pays” conflict of interest. In particular, the Staff recommended that each NRSRO examined consider and implement steps that would insulate or prevent the possibility that considerations of market share and other business interests could influence ratings or ratings criteria. Each examined NRSRO stated that it would implement the Staff’s recommendations.
- The Staff has recommended that each NRSRO examined conduct a review of its policies and procedures for managing the securities ownership conflict of interest to determine whether these policies are reasonably designed to ensure that their employees’ personal trading is appropriate and comply with the requirements of Rule 17g-5. Each examined NRSRO stated that it will implement the Staff’s recommendation.
- The Staff has recommended that two of the NRSROs examined review whether their internal audit functions, particularly in the RMBS and CDO ratings areas, are adequate and whether they provide for proper management follow-up. Both of these NRSROs stated that it will implement the Staff’s recommendation.