The three principal rating agencies in the world, Standard & Poor’s, Moody’s and Fitch, are well known. But another one has garnered some attention recently... how ? By having more insight, or less fear, than the others. It has downgraded the United States one month before S & P, France before others, and Germany, the last AAA of this historic trio : we’re talking about Egan Jones.
Newcomer’s arrogance or publicity stunt ? Perhaps. Crime of lèse-majesté ? For sure. This is how one should understand what just happened to it. The punishment is quite severe : the Securities and Exchange Commission (SEC) has forbidden Egan Jones to publish its rating notes on States for 18 months (SEC’s announcement), a stupefying decision.
The Dodd-Franck rulings had called for the SEC to encourage the existence of more independent rating agencies in order to reinforce competition. Let’s recall to that effect that the rating agencies had given a AAA rating to the subprime loans right up to when the market collapsed, so they bear a part of the responsibility in the crisis. The SEC is actually doing a u-turn here.
The reasons given by the SEC are grotesque. Egan Jones is accused of not following some rules of homologation, to avoid conflicts of interest; a bureaucrat found some badly filled form. But let’s go to the root of the problem : Egan Jones does not charge the States for its services, it does so graciously, contrary to the three others. They are the ones swimming in a sea of conflicts of interest !
This decision, which is a first, reveals something much more dire. When the three top agencies were finger-pointed following the subprime crisis, they explained that their ratings were in fact opinions and, as such, protected by the first amendment of the American constitution guaranteeing freedom of speech. It seems that Egan Jones does not benefit from it.
Doesn’t forbidding Egan Jones to publish its notes on sovereign debts equate to a limitation of its freedom of speech ? Will a bank or an analyst be punished the same way tomorrow ? Will they censor a TV station or a newspaper on this subject ?
The bread and butter of Egan Jones is its businesses ratings, but the impact of this decision in terms of image and visibility will be significant. And it will serve as a warning to any newcomer in this business. Crony capitalism, encompassing now regulating organisms such as the SEC, just went one step further by challenging a fundamental right.