Credit rating agency reform: The best action is no action

In a strange turn of events, the Securities and Exchange Commission Tuesday extended its no-action position against the credit rating agencies. It’s strange, because it seems regulators are struck with an acute case of amnesia. And honestly, it’s not such a bad infliction. The SEC is currently reinventing itself as a regulator with some serious enforcement behind it, most notably in the Goldman Sachs $550 million levy. However, the message is now that the rating agencies, which largely escaped massive scrutiny under Dodd-Frank, are not only vital to the securitization process, but able to self-improve and self-regulate. To be clear, the markets are all for no action against the credit rating agencies. The SEC announcement removes an element of uncertainty from asset-backed securitizations.  “Although new regulatory challenges still remain for issuers, the SEC has eliminated an otherwise intractable obstacle to new issuance,” said Royal Bank of Scotland analysts Paul Jablansky and Brain Lancaster in a note to clients Tuesday. Some history first. The Securities Act of 1933 exempts rating agencies from being considered experts that contribute to the creation of the offering documents. Dodd-Frank repeals that exemption. The result was that the ratings agencies refused to follow the Dodd-Frank reform, and Fitch Ratings, Moody’s Investors Service and Standard & Poor’s all released statements that day saying none were willing to take “expert liability.” The much-ballyhooed attempt by Congress to rein in the credit rating agencies led to a standoff with the SEC, freezing the ABS markets in the interim. And according to a Tuesday letter from the SEC, it appears the regulator is going soft again, and with good reason. “We understand that the rating agencies continue to indicate that that they are not willing to provide their consent at this time, and that without an extension of our no-action position, offerings of asset-backed securities would not be able to be conducted on a registered basis,” writes Katherine Hsu, SEC senior special counsel. “Given the current state of uncertainty in the asset-backed securities market and the benefits to investor protection resulting from Securities Act registration, the division is extending the relief…” In the end, cooler heads are prevailing, as the SEC extension allows for both the implementation of regulations but without shutting down new issue ABS. As with the Cuban Missile Crises, the American public may never know how close it came to getting vast swaths of available credit wiped out in the New Year. And the SEC is once again allied with the secondary markets in an implicit nod to the necessity of credit rating agencies, which it should be mentioned, have made considerable strides in tightening and improving rating methodology. “It certainly alleviates the significant risk of a primary market issuance shutdown in late January,” write Barclays Capital researchers Joseph Astorina and Sarah Johns. “It also allows the securitization industry and regulators additional time to craft a compromise solution that would maintain robust public securitization markets.” But the effectiveness of this inspired solution is contingent on Congress not getting wind of it. For the moment the problems wrought by loose credit ratings in the run up to the housing bust appear largely forgotten. Good will is at an all time high and markets needed some positive news. Let’s just hope the word doesn’t get out. Jacob Gaffney is the editor of HousingWire. Write to him.