Consumer advocacy groups voiced concern over the appointment Friday of a Wall Street veteran to be the chief overseer of credit-rating agencies, which were found by two government inquiries to have been major causes of the 2008 financial crisis.
The Securities and Exchange Commission announced that Thomas J. Butler has been appointed the new head of the Office of Credit Ratings. He starts Monday and will supervise a staff of about 25 lawyers, accountants and examiners who will monitor firms such as Moody’s Investors Service and Standard & Poor’s.
Butler has no regulatory background, nor has he worked for a ratings agency. The SEC said Butler has spent the past 14 years at Wall Street firms – mostly in wealth management positions – including Morgan Stanley Smith Barney, the U.S. division of Swiss global giant UBS Securities, Citi Global Wealth Management and the now-defunct Australian financial firm Babcock & Brown, which helped pioneer the lucrative business of pooling loans into complex bonds.
“Tom’s background and experience will bolster the agency’s oversight and review of credit rating agencies,” SEC Chairman Mary L. Schapiro said in a statement.
Consumer advocates reached a different conclusion. They see someone who might be too close to the ratings agencies, which were instrumental in Wall Street’s creation of complex financial instruments that received AAA ratings that made them appear to investors as the safest of financial bets.
“The ideal candidate from our point of view for this job would have been someone who knows the credit-rating agencies inside and out, and is aware of their weaknesses, intimately knowledgeable about where they’ve gone wrong in the past,” said Barbara Roper, director of investor protection for the Consumer Federation of America.
Credit ratings serve as signposts to investors about the risk of default of a particular bond – whether a government bond like those under stress in Greece, Spain or elsewhere in Europe, or a complex mortgage bond like those that masked the housing crisis in the United States that began in 2006 and snowballed.
Under a sweeping revamp of financial regulation in 2010, shorthanded as the Dodd-Frank Act, the SEC was instructed to create an oversight office for the industry, which previously had only been regulated from a standpoint of investor protection.
The Senate Permanent Subcommittee on Investigations and later the Financial Crisis Inquiry Commission – both confirming earlier reporting by McClatchy Newspapers – concluded the ratings agencies molded their ratings on complex bonds, known broadly as structured finance, to the wishes of Wall Street investment banks.
The big banks were making huge profits, and ratings agencies got in on the game by providing the favorable ratings needed to allow institutional investors such as pension funds to purchase AAA-rated complex bonds. Moody’s Investors Services, whose biggest shareholder was billionaire investor Warren Buffett, saw its stock price soar from $12 a share to more than $72 on the back of structured finance ratings, and executives in that division effectively took over the storied company.
It’s not clear, based on Butler’s resume provided by the SEC, how much the new director has worked with the ratings agencies. That could make it difficult for him to understand how they create and change their methodologies, and the extent of pressure that investment banks have exerted as issuers of the complex bonds.
“If you really want to send the message that you are determined to fix that set of problems, that would be in my view the kind of individual you are looking for,” said Roper. “I am not saying anything specifically about this individual – he may be highly competent – but on the surface he does not appear to be the type of candidate we envisioned filling this job.”
Consumer groups will watch Butler closely, said Ed Mierzwinski, consumer program director for the advocacy group U.S. PIRG.
“It’s going to a very high-profile appointment because of the failure of the credit-rating agencies to act in an independent manner,” he said. “It’s a very important spot, and it was a very important failure of the regulators and of the system that contributed to the magnitude of the spectacular failure in our economy. It’s an area where Congress and the SEC need to watch over more closely.”
An SEC official, demanding anonymity in order to speak freely, said that Butler brings “extensive experience with ratings over his career working in various capacities as an issuer, arranger and investor, and well understands the positives and negatives of credit ratings and their impact on investors, financing and institutions.”
The SEC did not make Butler available for comment.