Taking on the Little Guy, but Missing the Bigger Ones - NYTimes.com

Taking on the Little Guy, but Missing the Bigger Ones - NYTimes.com

The Securities and Exchange Commission seems to think that it has done a much better job of investigating financial crisis wrongdoing than the Justice Department. And it’s true.
But it’s like being proud that you’re the “Dumb” of “Dumb and Dumber.”
A case the commission filed last week epitomizes a lot of what’s wrong with the agency, even under the supposed overhaul by its chairwoman, Mary L. Schapiro.
The agency brought a civil case against a tiny, iconoclastic ratings agency called Egan-Jones, run by the outspoken Sean Egan, accusing it of, well, essentially filling out forms wrong.
Before the S.E.C. charges, Egan-Jones was best known for two things: having made some bold calls about shaky credit prospects and having a business model that was different than that of the big boys — Moody’s Investors Service, Standard & Poor’s and Fitch. Mr. Egan’s outfit gets paid by the users of his ratings; the oligopoly gets paid by the issuers whose debt is going to be rated.You don’t need to be a hedge fund quant to see the conflict of interest: the more ratings, the more profits to the ratings agencies, so the temptation is to be extra lenient. And, boy, were they.
Mr. Egan wasn’t shy about pointing this out, often through media appearances. To be honest, one wondered how much was showmanship and how much was deep research.
But the world needs his brand of punditry, especially on Wall Street, where the uncorrupted are too afraid to speak out. Mr. Egan has been prescient on some important calls about declining credit prospects, ahead of both the European financial crisis and the American mortgage and structured finance bubble before that.
The S.E.C.’s case against Mr. Egan and his firm concerns a filing made in 2008 seeking special designation to be a “nationally recognized statistical ratings organization.” This status confers some rights and special privileges under securities laws, and it’s one of the main competitive advantages the credit ratings trinity has.
The agency makes a variety of allegations. For one, Egan-Jones represented in its application that it had 150 ratings on asset-backed securities and 50 ratings on governments, when it hadn’t issued any at the time, the S.E.C. says. To the guillotine! (Egan-Jones responds that it was using a different counting method.)
Some allegations are more serious, but only slightly. The agency contends that two Egan-Jones employees had a role in rating issuers while owning securities in those issuers. The firm says these employees had long-standing investments and that it actually brought these violations to the attention of the S.E.C.
All told, the allegations seem especially paltry when compared with the disastrous performance of the ratings agencies that matter — Moody’s and S.&P. Egan-Jones’s ratings didn’t cripple the global economy. Mr. Egan’s business model is far less prone to compromise and corruption. The inescapable conclusion is that the S.E.C. is letting Moody’s and S.&P. officials walk free while pursuing Mr. Egan on minor technicalities.