SEC commissioner Richard Roberts yesterday faulted Wall Street bond raters for missing the deterioration in Orange County, Calif.'s pooled investment fund, but added that the raters have a strong overall record in tracking municipal finances.
In several interviews with the Bond Buyer, Roberts said that the rating companies "have historically missed one once in a while, and they missed this one ... They still do a very good job overall and a much better job than other organizations."
Robert's comments mark the first time a high-ranking commission official has publicly assessed the actions of the municipal rating agencies in the months preceding the meltdown of Orange County's pooled investment fund.
At the moment, county officials said the fund has experienced about $2 billion in losses and the county has filed for protection under Chapter of the federal bankruptcy code. Two weeks ago, county Treasurer Robert Citron, who managed the pool, resigned after disclosing that his strategy of leverage and investment in derivatives produced billions of dollars in losses.
To be sure, neither Moody's Investors Service nor Standard & Poor's Corp. rate the fund, which is being liquidated amid huge losses. And many market analysts complain that inadequate disclosure requirements prevent them from keeping tabs on the fiscal health of many issuers.
But the fund's deterioration had a direct impact on the bonds of the county and the participants in the pool. Several issuers have defaulted on bonds rated by Moody's and Standard & Poor's, and many market participants said the raters should have more actively examined the county's investment practices.
"Many people are wondering why Moody's and Standard & Poor's were not ahead of the curve," said one high-ranking investment banker who asked not to be quoted by name.
For his part Roberts said he believes bond raters could have done better in assessing the deterioration of the Orange County portfolio, which appeared to experience liquidity problems months ago.
But Roberts added that overall, raters have done well in protecting the interests of bondholders who rely on ratings in making investment decisions.
"Yes, they could have done a better job on this," Roberts said. "Still, I'm not sure there is anyone else out there who could do what they do."
Karen Krop, assistant vice president at Moody's, said the rating company had no comment on Roberts'remarks.
Said Glenn Goldberg, a managing director at Standard & Poor's: "It's easy to be a Monday morning quarterback on an isolated rating. Standard & Poor's, which rates more than 50,000 issues in the U.S. municipal market, has an outstanding record in providing timely, accurate and objective opinions."
Amid the Orange County crisis, some staffers at the commission as well as lawmakers on Capitol Hill said discussion has emerged about some form of regulation over the bond raters.
"I think it underscores the need for a heightened level of SEC scrutiny over rating agency activities," said a key House congressional aide, who asked not to be named. "I think the rating agencies were asleep at the switch."
Some members of the SEC staff said the reaction of the rating agencies to Orange County may also form part of the debate over what the agency calls "nationally recognized statistical rating organizations."
In September, the SEC issued a "concept" release asking whether the agency should establish formal procedures for designating and monitoring credit raters as NRSROs.
The response of the raters to Orange County "incrementally impacts" the debate over the organizations, "but not substantially so," Roberts said.