Financial Regulatory Forum

Unintended consequence – an unregulated U.S. credit rating industry? – The Scott McCleskey Report

By Scott McCleskey, Complinet

Suppose a law were passed that made driver licenses optional. If you want one, you’d still need to pass exams and pay fees every few years, and you’d be subject to fines for speeding and parking violations. Or you could just say ‘no thanks’, turn in your license, and get back on the road. Of course, no lawmaker would contemplate such a thing. But flawed provisions in the Dodd–Frank Act would do exactly that for the credit ratings agencies, making regulation an optional multimillion dollar expense.

The license in question is designation as a Nationally Recognized Statistical Rating Organization (NRSRO). Having this status used to mean something. NRSRO ratings have been written into the financial regulations for a good thirty years, so that the designation was a license to print money. Yet until Congress passed a law regulating them in 2006 (only implemented in late 2007), there were virtually no regulatory requirements imposed on NRSROs and their activities. We all know how that turned out.

OUT FOR BLOOD

The 2006 law imposed requirements, costs and penalties for non-compliance on the NRSROs, but it was still worth the bother to be one because the designation was required in order to do business. But the financial crisis exposed both the flaws in the way the NRSROs conducted their ratings and the widespread damage that their mistakes could cause, and the politicians were out for blood.

Putting a large portion of the blame on the rating agencies was not unfair. (Disclosure: I was responsible for compliance at one of the NRSROs, but have testified in Congress against the firm and we are no longer on speaking terms). Yet the policymakers’ obsession with killing off the NRSROs led them to take the foolhardy approach of requiring the removal of references to NRSRO ratings from all federal regulations. In so doing, they will remove the primary reason to be an NRSRO, taking away the benefit and leaving only the cost.

And the cost is not small: In the quarterly report most recently issued by Moody’s, the firm estimated the cost of complying with new regulations to increase by approximately $15m in 2010 and $15m to $25m in 2011. That’s on top of whatever they’re spending now, and it’s a safe bet that S&P and Fitch are also writing some pretty big checks. Only a fraction of that figure will actually go to compliance departments, as the figure no doubt includes defending themselves in court and the cost of lobbying Congress. Nonetheless, that’s all money they could keep if they didn’t have to comply with NRSRO regulations.

from Global Investing:

Cassandra’s curse?

It ain't easy being an oracle.

Pilloried for going too easy on the mortgage-backed securities that eventually sparked off the global financial crisis, credit rating agencies have been accused more recently of being trigger-happy on euro zone sovereign ratings downgrades that have roiled global markets.

The likes of Moody's, Standard & Poor's and Fitch are now in the cross-hairs of government regulators, with the G20 set to endorse reforms aimed at curtailing investors' reliance on these ratings.

But other than credit ratings, do investors have alternatives to assessing credit risk?

CFTC rules point to crackdown on manipulation: John Kemp

– John Kemp is a Reuters market analyst. The views expressed are his own –

By John Kemp

NEW YORK, Nov 9 (Reuters) – Two proposed regulations published by the U.S. Commodity Futures Trading Commission (CFTC) clarify its power to take enforcement action in cases of market manipulation and are intended to lead to a tougher regulatory regime in future.

The Commission is giving effect to the sweeping provisions of Section 753 Dodd-Frank Wall Street Reform and Consumer Protection Act (PL 111-203) which give it strong new powers over market manipulation and spreading false information.

ANALYSIS-Fair-value accounting may be coming for real estate

By Dena Aubin

NEW YORK, Nov 2 (Reuters) – U.S. rule-makers are mulling an expansion of fair-value accounting to land and buildings held for investment, a change that could reshape the balance sheets of hundreds of real estate companies.

Fair value, which measures assets by their market worth rather than historical cost, is at the center of a big debate in the banking sector, where the Financial Accounting Standards Board is broadening its use. (more…)

Weapons against U.S. muni fraud difficult to wield

By Lisa Lambert

WASHINGTON, Nov 2 (Reuters) – The strongest weapons that U.S. regulators use to combat fraud in the $2.8 trillion municipal bond market have long been financial disclosure requirements, but rules on their content and timeliness are proving difficult to wield.

(more…)

Wall Street reform gridlock seen after US elections

By Kevin Drawbaugh

WASHINGTON, Oct 28 (Reuters) – If Republicans make big gains in U.S. Congressional elections on Tuesday, as expected, Wall Street and big banks will have sweet, but incomplete, revenge on Democrats who drove through sweeping financial reforms against industry opposition.

The likeliest outcome of Democrats losing control of one or both chambers of Congress will be divided government and two years of legislative gridlock on issues important to the financial services sector, said policy analysts and aides.

That means the sector’s regulatory headaches — near migraine level following the enactment in July of the Dodd-Frank Wall Street Reform and Consumer Protection Act — won’t get worse, but probably won’t get much better, either.

ANALYSIS-Mortgage investors will have trouble fighting banks

By Al Yoon and Matthew Goldstein

NEW YORK, Oct 20 (Reuters) – Houston attorney Kathy Patrick represents a group of powerful mortgage investors trying to wring money out of Bank of America, but many legal experts say her chances of winning are slim.

For the second time in two months, the Gibbs & Bruns partner has sent a letter to a big bank trying to get some measure of financial relief for her clients who hold $16.5 billion of home loans packaged into bonds.

(more…)

FACTBOX-Foreign companies stepping away from Iran

Oct 20 (Reuters) – Iran’s day-to-day business is affected by tighter international, U.S. and European Union sanctions imposed in response to Western fears the country’s nuclear activities are aimed at making a bomb. Tehran says it has no such aim.

Tighter sanctions have scared away the Islamic Republic’s usual trading partners, particularly in the oil and gas industry, where the country has been dependant on fuel imports.

Following are key facts on some firms that have been moving away from Iran and on others still dealing with the country:

SNAP ANALYSIS-EU states tone down hedge fund rules

By Huw Jones

LONDON, Oct 19 (Reuters) – European Union finance ministers have reached a compromise on the bloc’s first set of rules to directly supervise managers of hedge funds, private equity groups and other alternative investment funds from 2013.

Foreign funds will face a two-year delay until 2015 in obtaining a “passport” to operate across the 27-nation bloc.

Negotiations over the new rules have taken months due to a stalemate between Britain, home to the EU’s biggest hedge fund centre who wanted to tone down some elements, and France, which pushed for tougher regulation.

from Tales from the Trail:

Think brussels sprouts and cauliflower are agricultural commodities? Think again.

While the financial bailouts tossed to automakers, banks and other groups during the recent economic crisis left a funny taste in the mouth of some Americans, one former U.S. regulator hopes efforts to prevent another panic doesn't go rotten.

The U.S. Commodity Futures Trading Commission is immersed in drafting dozens of rules to assist it in increasing oversight of the once opaque over-the-counter derivatives market, widely blamed for exacerbating the recent financial crisis. USA/

Among the rules it must craft is what the definition of an agricultural commodity is? Of course, corn, cotton, soybeans and livestock, among other items, fall into this realm.

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