Wicker, the Journal notes, did get a measure through the Senate a decade ago that would have created an oversight board to assign firms to rate deals. But in yet another sign of credit raters’ entrenched position in the financial system, the plan made it into the Dodd-Frank legislation with enough wiggle room for the SEC to contend that it studied alternative business models, yet ultimately nothing changed.
This is not to say that elected officials, regulators and investors should simply stay quiet and accept the status quo. The persistent attention paid to triple-B rated companies and their “fallen angel” risk keeps both corporate executives and credit analysts on their toes. Public comments like Kroll’s, even without an unsolicited rating, are a welcome and healthy development. I wish they were more frequent.
But the reality is any attempt to drastically revamp the credit-rating industry faces long odds. SEC Chairman Jay Clayton wrote in response to Massachusetts Senator Elizabeth Warren, who is also concerned about the credit-rating industry, that “it is important to consider whether further reforms are necessary or appropriate.” The Journal characterized this as potential openness to additional rules.
I don’t see it that way. The investment-management industry is consolidating, with the biggest firms with the strongest in-house research analysts surviving. They know the incentive structure of credit-rating firms tilts toward higher grades and adjust accordingly. Ask just about any professional corporate-bond buyer, and they’ll tell you they don’t rely on published ratings because they’re backward-looking relative to the public markets.
It’s never a bad idea to toss around ideas about how to improve a crucial part of the financial system. For the credit-rating industry, though, a true overhaul is unlikely to get past that deliberative stage.
This article was provided by Bloomberg News.