Sunday, September 6, 2009

David Kotz's tree in the forest

Here is another example of a clueless government bureaucracy missing the point when it comes to what was at the heart of the financial crisis.

David Kotz, the SEC's inspector general, has decided that the real problem with the SEC's supervision of the rating agencies (Nationally Recognized Statistical Rating Organizations - "NRSROs") is in the application process. In order for a start-up to become an NRSRO, the firm has to go through an approval process with the SEC, and the key issue according to the inspector general is the flaw in the process. Moody's, S&P, and Fitch (the Big Three) must be ecstatic. The SEC will be making it that much harder for any new competition.

The key issue Mr. Kotz identified in the SEC's supervision of NRSROs has been one "improperly approved" small rating agency because of the possible inaccuracy of the firm's financial statements and questions about the firm charging "reasonable" fees (the report blanks out the name of the NRSRO in question). Talk about focusing on a tree without seeing the forest.
So that's what went wrong with the massive ratings fiasco of structured credit paper - a start-up was improperly approved. Incredibly, the new rules Mr. Kotz is proposing will make it that much more difficult, tedious, and expensive for new rating agencies to enter the market, virtually assuring the Big Three's oligopoly.

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