Regulators grapple with replacement for credit ratings
Thursday, March 3, 2011
Passing a law with the lofty aim of preventing future financial crises was hard enough; turning it into detailed rules is proving in some cases to be no less difficult.
For example, there is general agreement that credit ratings gave the financial world a misplaced sense of confidence in assets that were no better than junk. Rating agencies such as Moody's and Standard & Poor's put their AAA stamp of approval on securities grounded in the quicksand of subprime mortgages.
Washington's regard for credit ratings sank so low that Congress directed regulatory agencies last year to comb their rules and get rid of language that uses those ratings as a formal measure of credit-worthiness.
Now, as regulators struggle to rewrite the rules, they are confronting a deeper question: What should replace credit ratings?
The Securities and Exchange Commission grappled with the issue Wednesday as it turned to the task of purging credit ratings from the rules for money-market funds.
"I have serious misgivings because it appears no appropriate substitute has been identified," SEC Commissioner Luis A. Aguilar said.
Regulators at a range of agencies are trying to translate Congress's Dodd-Frank law into nitty-gritty regulations on such complex issues as mortgage lending, derivatives trading and the amount of capital banks must hold as a fallback against losses. High-stakes lobbying campaigns that were concentrated on Capitol Hill last year have scattered to federal offices across the city.
In some cases, the challenge is magnified because the law left a lot to regulators' discretion. In other cases, regulators complain that they have been straitjacketed. The questions range from the broad to the ultra-technical.
In the realm of credit ratings and money-market funds, Aguilar said, the SEC staff faced an "impossible challenge."
Money-market funds are supposed to be safe places for consumers to park their money. Under current rules, the funds are generally required to invest in securities that have very high short-term credit ratings.
Following the Dodd-Frank law, the SEC proposed new rules Wednesday that would leave money-market funds to determine for themselves whether assets are safe enough to hold.
Aguilar outlined a series of potential problems with that approach, echoing arguments raised by a variety of critics when the SEC considered the issue in years past.