State regulators shame SEC, ponder ditching rating agency role
Why doesn’t the Securities & Exchange Commission have the nerve to strip away the powers they gave to the ratings agencies decades ago? In this scoop from the Wall Street Journal, we learn that state regulators are trying to do just that for insurance companies, mega-bond investors who lost tons in the mortgage security melt-down:
Regulators of some of the biggest bond buyers in the world are considering cutting credit-ratings firms’ role in the market in response to botched ratings of complicated mortgage securities.
Ratings firms including Standard & Poor’s and Moody’s Investors Service are facing fresh dissent from state insurance regulators, who are considering moving away from the firms ratings’ as a way of measuring the health of insurer portfolios of mortgage-backed bonds.
This is a really big deal. Insurance companies lost billions as a result of rating agency incompetence:
Insurers have a lot riding on the outcome of the debate. Life insurers are big owners of mortgage-backed securities, which represent about 8.5% of insurers’ portfolios, according to A.M. Best Co. U.S. life insurers had to ante up a total of $2 billion in capital in 2008 to back up residential mortgage-backed securities to satisfy regulators seeking assurance companies have enough money to pay claims, the American Council of Life Insurers said. As of June 30, the insurers were facing a year-end bill of $11 billion to back up such securities, the trade group said.
So here’s the score: Statists-1; federalists-0.