Sean Egan Takes On The SEC's Rating Cronyism

Tyler Durden's picture

Remember when in the days after the Lehman bankruptcy the financial system almost collapsed and the Fed was forced to pump several trillion of dollars into various swap arrangement almost overnight to prevent a so-called cataclysm? A primary culprit for this was the Reserve Fund "breaking the buck" due to its extensive investments in Lehman Brothers, which finally emerged as being woefully overmarked once Dick Fuld's fortress could not longer rely on Goldman's benevolence and thus all exposure had to be properly marked (at significantly lower prices). And the reason why the Reserve Fund was allowed to invest in Lehman? Inflated ratings by such perpetual Kool-aid drinkers as S&P and Moody's. At the time, everyone ignored that Egan-Jones had rated Lehman sufficiently low, that Lehman would have been disqualified Lehman as a threshold investment.

Today, Sean Egan has had enough of this consistent cronyism between rating agencies and the entire financial system, and has demanded accountability from the SEC for not just on basis of the ratings, but the motivations behind them (attached). Zero Hedge stands firmly behind a process whereby remuneration incentives to artificially inflate ratings are properly disclosed, especially when the opportunity cost of doing so is another systemic collapse, such as the one we almost experienced with the Reserve Fund's failure.

Furthermore, now that the rating agencies are being invoked again to plaster AAA ratings on the trillions of loans that will soon make up the newly created, taxpayer subsidized securitization conduits such as TALF and PPIP, this is recipe for another disaster, and this time of even bigger proportions. Once it becomes clear that these AAA ratings are the proverbial "emperor's lack of clothes" all over again, and another bank run is attempted, it likely will be the case that the Fed's pumping of trillions in excess liquidity will be no longer sufficient, as the problem has scaled by orders of magnitude.

Whether this happens tomorrow or in ten years is irrelevant: the foundation is patently hollow and conflicted (we are relying on S&P and Moody's to be objective for god's sake - if we have learned one thing in the recent crisis, it is that these firms can be anything but) and as long as the SEC allows comparable behavior to what brought us here in the first place, the risk will be forever present, and has to be removed immediately.

It is in the SEC's best interest as an alleged regulator and protector of the investing US class (not just landed Wall Street interests) to take these comments seriously unless the current executive management team wants to find itself on the wrong side of a eventual criminal proceeding. Egan's warning has now been made public and the SEC will no longer have the comfort of pleading stupidity, and denying it was ever made aware of this admonition.

Dear SEC - continue abusing the public's increasingly declining patience with your lack of integrity and inability to prosecute those at fault for the current crisis at your own peril.

The full letter from Sean Egan to the SEC is presented below.


Sean Egan Letter -