Wednesday the SEC is scheduled to propose new rules for credit rating agencies.
The Wall Street Journal predicts in a Tuesday preview that, if ultimately approved, the rules "may diminish the longstanding importance of credit ratings across various markets." Well, don't deliver a eulogy for the rating agencies just yet.
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Yes, they are in hot water for missing the lead-up to the subprime crisis, and their long term critics have used the recent disaster to weaken the agencies' ability to "extort" contracts from debt issuers that need investment-grade ratings. Yes, the proposals are expected to end the monopoly of major agencies such as Moody's Investors Service, Standards & Poor's and Fitch Ratings on the ratings business and require investment managers to exercise more responsibility for reviewing the debt in their portfolios.
However, the notion that managers will be able to ignore agency ratings, especially bad ones, is an exaggeration to say the least. Managers of pensions and other conservative portfolios who invest in low-rated securities against the recommendations of the big agencies will face torches and pitchforks if those bets go sour. Look for the agencies' business to remain AAA. - Bill McConnell
