By Jonathan Weil
How's this for a timeline?
In July 2011, Egan-Jones Ratings Co. became the first nationally recognized statistical rating organization to downgrade the U.S. below AAA. In April 2012, Egan-Jones cut the U.S. government's credit rating an additional notch to AA from AA+.
Later that month, the Securities and Exchange Commission's enforcement division accused Egan-Jones of securities-law violations related to errors in the company's 2008 application to expand its license as a nationally recognized rater. Last September, Egan-Jones downgraded the nation again, this time to AA-.
Then today, the SEC said it reached a settlement with Egan-Jones, under which the company "agreed to be barred for at least 18 months from rating asset-backed and government securities issuers as an NRSRO." The deal doesn't affect Egan-Jones's license to rate corporate debt.
Maybe downgrading the U.S. had nothing to do with the SEC's decision to target Egan-Jones, which neither admitted nor denied the SEC's claims. Regardless, the chronology looks chilling. In essence, Egan-Jones was accused of "filling out forms wrong," as Jesse Eisinger wrote in a New York Times column last May about the company and its outspoken leader, Sean Egan.
It's curious that the SEC went after Egan-Jones -- a tiny shop that makes its money from selling subscriptions to investors -- but has given a free pass to the biggest credit raters, Standard & Poor's and Moody's Investors Service, notwithstanding the dubious AAA ratings they assigned to thousands of garbage subprime mortgage bonds before the financial crisis. (Unlike S&P and Moody's, Egan-Jones doesn't collect rating fees from issuers of securities.)
Let all of this be a lesson to anyone else who asks regulators to formally recognize their opinions on certain subjects. The government one day might decide their views aren't fit for public consumption.