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Egan-Jones Lives to Fight the Government Another Day

By Jonathan Weil
January 22, 2013 3:00 PM EST

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.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

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