Sweeping and significant change in the financial world - closing down the Wall Street old boys club - remains a dim and distant prospect.
One sign is the Federal Reserve Board's recent reward of up to $400 million in fees to the Big Three credit rating agencies - Standard & Poor's, Moody's Investor Service and Fitch Ratings - whose over-rating of risky securities fueled the economic meltdown.
Hopes for a new regulatory era - more robust and proactive - are hardly encouraged by the Federal Reserve's decision to steer bailout business to the Big Three and shut out competition from other qualified credit rating agencies.
The Fed had a golden opportunity to enable major systemic reform by opening the credit ratings market to desperately needed competition from seven other credit rating agencies fully accredited by the Securities and Exchange Commission. With its rules for rating securities backed by its $1 trillion Term Asset-Backed Securities Loan Facility, the Federal Reserve should have carried out Congress' clear intent in the 2006 Credit Rating Agency Reform Act and assured that all 10 credit raters have a fair shot.
Nearly as important, reform would have sent a powerful message: Failure has consequences.
Instead, the Fed required that asset-backed securities serving as loan collateral in TALF be rated by two or more "major nationally recognized statistical rating organizations." Under the Federal Reserve's definition, the only credit rating agencies deemed "major" are the Big Three.
This requirement establishes a closed market for credit rating services for asset-backed securities in the foreseeable future - the only permitted participants being credit raters who have dominated the market for years and made the program itself necessary by their reprehensible over-ratings.
I have written Federal Reserve Chairman Ben Bernanke asking him to repeal the rules that reinforce the Big Three's monopoly and to allow their seven SEC-accredited competitors to compete. I have also subpoenaed the Big Three as part of my ongoing antitrust investigation into the oligopoly that now exists in the credit ratings market to determine whether they had any role in raising this new barrier to competitors.
The Big Three credit rating agencies' breach of trust was at the core of our catastrophic economic contraction, helping bring our credit system to the brink of collapse. They massively and systemically over-rated certain types of securities - especially risky pools of bundled subprime mortgages and other debt - leading to false reliance on their safety. When the values of these securities cratered, investors lost hundreds of billions of dollars, helping to precipitate the credit system collapse.
In October, former Federal Reserve Chairman Alan Greenspan told Congress "unrealistically positive rating designations by the credit agencies was, in my judgment, the core of the problem," referring to the economic meltdown.
Indeed, one of Congress' primary goals in enacting the Credit Rating Agency Reform Act of 2006 was to increase competition among credit raters and "improve ratings quality for the protection of investors." Congress specifically stated that this was vital because of "failures by the large credit rating agencies to warn investors in a timely manner about the impending bankruptcies of Enron, WorldCom, and others."
The Federal Reserve Board's failure to hold accountable credit rating agencies that helped torpedo the economy, and its refusal to open the credit ratings market, is inexplicable and unacceptable.
TALF's success depends on accurate rating of new securities. Given the track record of the Big Three, guaranteeing them all the work seems to fit the classic definition of insanity: doing the same thing again and again and expecting a different result.
Longer term, the entire business model for rating agencies should be revisited -- including the sources and methods of fee payment. But short term, simple and straightforward steps are necessary now.
Rebuilding and reforming our financial regulatory system must begin with watchdogs that can really hunt - competing rating agencies with the skill and integrity to reliably assess risk.
Blumenthal is Connecticut's attorney general.