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 -

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Mos's picture

Way too logical for the SEC to actually do anything about this.  They only operate in the realm of lies, corruption, stupidity, and incompetence.

pigpen's picture

Tyler, will you make some t-shirts emblazoned with the following:

"Dear ____ - 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." - Tyler Durden

I will take 5 size tall xxl

VegasBD's picture

Think you got a good idea there. Logo on front, that line on the back. Id take one.

Anonymous's picture

The shirt won't be necessary.

As we know, the pump monkeys can't stave off crashes (they never have been able to, and they never will).

Impatience with the SEC wanes in a bull market. But wait until the bear comes back and rips the face off mom-and-pop investors across the country.

Then watch what happens to patience with the SEC...

overpath's picture
overpath (not verified) pigpen Aug 26, 2009 8:27 AM

, crossing the street accident but it surely is a joy to read the ruling....

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

gmrpeabody's picture

A couple of XXL reg, plz.

Anonymous's picture

thank you sean. thank you.

Anonymous's picture

and please offer 2 pack bumper stickers, my deflated net worth doesn't allow 10 packs :(

avatar's picture

my shrunken net worth does not allow me to purchase 10 packs of bumper stickers, but I could reach into my pocket to buy 2! If only I could....

AN0NYM0US's picture

Interesting discussion from earlier today with Simon Johnson (Baseline Scenario) discussing Bernanke's appt.

OrganicGeorge's picture

I'm gona enjoy this ride.

Bubby BankenStein's picture

Beneficent Berkshire Hathaway should dump holdings of MCO.

Anonymous's picture

Thanks for sharing this. It is unbelievably disgraceful & appalling to me that these so-called "rating" agencies are even allowed to operate at this point. What an absolute crock of BS that is.

And in terms of all the FED bailout/funding/securitization programs primarily directed at WS's finest thieves, I find it fascinatingly disgusting that my own mother (a retiree with very little savings) was a victim of the aforementioned Reserve Primary Fund's sub $1 debacle. And guess what? She still has only received 90 cents on the dollar, an entire year later! It was a f'in money market fund for Lord's sake! I mean, AIG starts cracking, and GS gets $13B in a flash. Why the f*ck hasn't someone done something to pay back my mum?!?!?!

Anonymous's picture

because your mum is not sliding payola under the

Anonymous's picture

This issue really does not need to be addressed.

The genius of the current financial system is that any compromise of sound fundamental practices can be countered by the issuance of more Treasury debt, lowering the Fed target rate, quantitative easing, and other backstopping programs.

All failures in practice and judgment need never be realized.

AN0NYM0US's picture

does anyone have a barf bag


even CalculatedRisk has jumped on the Bernanke band wagon according to this WSJ article and his Blog

VegasBD's picture

Calculated Risk is all of a sudden a Bull lately. Specially on housing. Something changed over there. Anyone else notice that? I dont like stepping out of my doom and gloom bubble. heheheh

Anonymous's picture

being Bullish - no problem with that - but endorsing the Fed and Bernanke ... that's a whole different issue

capitalisa's picture

Hasn't been the same at CR since Tanta died :(

passive_lurker's picture

Who's the bigger fool:  the bankers that repackage the garbage, the ratings agencies that slap AAA on them, or the investors that will be buying them?

lizzy36's picture

Easy answer: the u.s taxpayer who is being bent over in perpetuity to fund the repackaging of the garabage.

AN0NYM0US's picture

Someone posted earlier about Rosenberg and his letter today about  the flim flam of estimates and revised estimates and beating estimates.

whacked's picture

You missed a prime fool, the one that sold them knowing full well that they were garbage and then insured against them.


That gorilla should be sued ... in my dreams anyway.

Project Mayhem's picture

Even though it's 55 days after June 30, 2009, the FDIC still hasn't released their Q2 report.


deadhead's picture

i believe Thursday the 27 is the day.

Project Mayhem's picture

Thanks.  Looks like they are going for 57 days instead of 55.   The suspense is killing me.

Miles Kendig's picture

The SEC has but one job.  It isn't a regulatory or consumer protection agency.  It  job is to simply:






straightershooter's picture

More like




Anonymous's picture

Look, the only problem with credit ratings is that government rules require their use. Get rid of those rules and let the buyer beware. Sorry folks, investors need to take responsibility for their decisions. They can use ratings or not in their decision process. Rating agencies will get it wrong again in the future - just like lots of investors will frequently be on the wrong side of the market -- just a bunch of fallible humans. You can change the rating agency compensation system, and they still will not get it right.

Anonymous's picture

correct - because their job is not to render
professional opinion but to collect fees....

that may sound cynical but that is precisely the
purpose of their trade....

if they were required to assume some kind of responsibility
for their decisions or suffer consequences for
poor assessments then matters might change....

however, the caveat emptor solution is the most
rigorous provided moral hazard has not been
compromized by backstops, bailouts, and cronyism

KevinB's picture

When the shite was hitting the fan last year, I posted something on Dealbreaker (before that site degenerated into the scatalogical sophomoric idiot fest it is now) saying, in effect, "What about the ratings agencies? They rated all this crap AAA. Don't they share some of the blame?", for which I was chastised in impolite and anatomically impossible terms. Glad to see the more intelligent posters here agree with me.

SWRichmond's picture

The mentioned Kool-Aid ratings agencies have been captured, by virtue of their having been outed in episode 1.  Notice no investigations, prosecutions, etc?  "Gitmo, or AAA.  Pick one."

Anonymous's picture

Laws, rules and regulation are designed to prevent specific problems and harm.

The constant attack on the rules and the government by the so-called "right"--including may I add judges of the same political persuasions who believe their job is to NOT enforce rules they disagree with, or in my experience to only enforce rules when it happens to benefit their friends-- have made it far more difficult for the SEC and other agencies far more difficult.

Not to say the SEC and other regulators have done such a great job, as Mr. Durden points out, but at the moment we've starved the watchdogs, told them the fences are not appropriately placed and so should not be enforced, and now are blaming the watch dogs when the theives have climbed the fences and stolen the goods.

Not so great for the country when the (first Reagan) and then recently VP Cheney claims the executive branch should not have to follow such hallowed rules such as Constitution Article 1, Section 8 which reads in part:

"Section 8: The Congress shall have power
To lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defence and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

To define and punish piracies and felonies committed on the high seas, and offenses against the law of nations;

To declare war, grant letters of marque and reprisal, and make rules concerning captures on land and water;


To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.
Many powers of Congress have been interpreted broadly. Most notably, the Taxing and Spending, Interstate Commerce, and Necessary and Proper Clauses have been deemed to grant expansive powers to Congress."

Anonymous's picture

"Deemed" but this doesn't mean it is right.

The Commerce Clause and other parts of he constitution have been stretched so loose now by the progressives, it has skewed the separation of the powers and given us the corruption we have today. This loosening by the progressives is now open to abuse by both the right and the left. Just look at the DEA and these crazy bailouts...

The government is just another monopoly out for its own interests and the special interest.

overpath's picture
overpath (not verified) Aug 26, 2009 8:27 AM

And in terms of all the FED bailout/funding/securitization programs primarily directed at WS's finest thieves,

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Anonymous's picture

I doubt that Elizabeth Murphy knows or cares who Sean Egan is.

glenlloyd's picture

The point is clear, however, the letter needs to be proofed and could be improved.

Unfortunately nothing will likely come of it...

Fish Gone Bad's picture

For all those brazen enough, send Elizabeth a postcard (not a letter).

Elizabeth M. Murphy, Secretary
Securities and Exchange Commision
100 F Street, NE, Washington, DC  20549

Dear Ms. Murphy, I have always wondered what it was like to have no integrity.  Perhaps the March of Dimes can help you find a spine so you can finally do your job.


Taxpayer #xxx-xx-xxxx

channel_zero's picture

Let me get this straight.  The newspeak chanted by most active market participants is "Big government and all its messing about in markets is bad."  So, +/- 25 years ago, this dream of yours slowly becomes a reality.  Regulators like the SEC are systematically starved.There are a few other, ohh like the regulator that stood watch over AIG...

Today, you want your small government AND powerful regulators?  The contradiction is untenable.  Or maybe it's the case your version of 'small government' means funding your pet projects.

You want stronger regulatory agencies?  Well, who's gonna pay for them? You?