Blowback From ’09: SEC To Consider New Regs On Financial Industry

The SEC is considering the adoption of new rules that would target two financial industry practices widely considered to have been major factors leading to the world-wide recession of 2008-2009: the bundling of junk assets into opaque securities, and conflicts of interest within the major credit rating agencies. In a post on the SEC website, Commission Chair Mary Jo White identified poor quality securitization as “an epicenter” of the financial crisis. “Done correctly,” she said, “securitizations can facilitate economic growth, providing critical liquidity to financial markets and help households and businesses get the capital they need. But, when done poorly, as during the years leading up to the financial crisis, securitization can destabilize markets by wrapping serious financial risks in a thin veneer of creditworthiness.” Specifically, the new rules would require disclosure of “asset-level information” about what’s contained in securities backed by mortgages, auto loans and leases. The rules pertaining to the credit-rating agencies would require more transparency about method, better internal controls, and presumably would address the conflicts of interest that arise when the rating agency is being paid by the entity being rated.