Summit News

Obama reforms to fall short: CreditSights

NEW YORK (Reuters) - Sweeping financial regulation announced by President Barack Obama on Wednesday is unlikely to achieve its goals of greater transparency or reform of rating firms that many blame for the credit crisis, CreditSights chief executive said.

Glenn Reynolds, chief executive officer of CreditSights, Inc., speaks at the Reuters Investment Outlook Summit in New York, June 17, 2009. REUTERS/Brendan McDermid

Regulatory reform is “not going to do as much as it will promise to do,” Glenn Reynolds, founder and CEO of research firm CreditSights, said at the Reuters Investment Outlook Summit.

The plan reaffirms SEC oversight over credit rating agencies and says the SEC should continue its efforts to strengthen regulation.

Rating agencies like Standard & Poor’s, Moody’s Investors Service and Fitch Ratings “created this beast,” Reynolds said. “I believe they were driving the bus, not pushing the bus.”

“They were enablers,” said Reynolds, who testified before Congress more than seven years ago, when similar calls for reform became popular after the collapse of Enron. “They were the ones who turned the inmates loose.”

Obama is seeking the biggest overhaul of financial regulations since the 1930s, and said the foundation for a strong U.S. economy must operate under transparent “rules of the road” to correct excesses that caused the credit crisis.

Obama wants to reduce reliance on ratings, and recommends differentiating between structured products and corporate bonds.

“This wasn’t just the failure of individuals,” Obama said. “It was the failure of many institutions.”

The reform measures failed to provide a significant boost to U.S. markets. Overall credit spreads were little changed to slightly wider in afternoon trading, while U.S. stocks fell slightly .SPX. U.S. government bond prices rose as traders scaled back bets the Federal Reserve could be forced to bump up interest rates by year end.

As detailed in an 88-page document, the administration plan calls for closing the Office of Thrift Supervision, a Treasury Department unit, and eliminating the federal charter under which savings and loans operate, with the objective of streamlining bank supervision.

In addition, the Federal Reserve would be assigned new duties to monitor risks that could threaten the entire financial system, working in conjunction with a council of other regulators to be chaired by the Treasury Department.

Additionally, the administration would increase regulation of credit default swaps (CDS) and other derivatives, which Reynolds said may be misguided.

“People want to blame CDS, which I just think is boneheaded,” Reynolds said.

Reynolds told the Reuters Summit he believes rating agencies are still correct in rating the United States as AAA, the top rating.

“It is really about confidence. The U.S. is triple A in my book,” he said.

For investors, good value can be found in investment-grade corporate bonds that offer high yields of more than 8 percent, particularly in the banking and utilities sectors, Reynolds said.

Investors should avoid industries, such as retailing, which may be vulnerable to the lack of consumer spending, he said.

“The consumers’ suffering is not going to end,” he said.

Reynolds also forecast a “multiyear” credit recession and that high-yield defaults should spike in the range of 10 percent to 12 percent.

“The ability to refinance gives you a lifeline,” he said. “We will peak next year.”

Reporting by Walden Siew; editing by Jeffrey Benkoe