Balancing the Blame
I know this fits the “rating agencies are the Devil” narrative in D.C., but a little balance is called for. If there was a failing in MF Global, it was in management and regulatory oversight. Management took the risk, and the blame lies with them.
Regulators are empowered to oversee the safety and soundness of regulated entities and are charged with intervening if there is a problem. Rating agencies observe this process as a third party.
Let’s have hearings and ask all three parties what they know and when they knew it.
Rating agencies publish ratings opinions.
Regulators monitor safety and soundness.
There is responsibility and blame to be assigned in this collapse. Let’s make sure it’s assigned to ALL responsible.
Congress Presses Rating Firms – The Wall Street Journal, January 5, 2012
EU vs. Rating Agencies
More government legislating behavior.
Let’s give the EU the ability to temporarily “ban” ratings on sovereign debt if they don’t like the ratings.
Let’s open rating agencies to liability, where THEY have to defend against a standard of proof that there wasn’t “gross misconduct.”
Let’s have the EU add more rules to “increase competition.”
The logic appears impossible.
The EU farce continues.
EU Proposes Rating Agencies Can Be Sued – The Wall Street Journal, November 15, 2011
Market Knows Best
I agree—how can the rating agencies’ evaluations be worthless and yet be the de-facto measurement for establishing bank capital measures?
I agree—let’s have the ratings be allowable metrics for creditworthiness, but not the sole determinate of credit quality. They never were meant to be, or defined, that way. Politicians, regulators and investors had all better get to a common definition of what a rating tells us, before we all decide how they can be used.
Then, let’s allow market forces determine winners and losers.
The Next Best Thing
It’s about time.
I’m glad someone else noticed that the NAIC has a workable solution. It might not be optimal, but it works.
(I would prefer to have the ratings fixed, rather than replaced).
See our posts starting 11/19/09.
[$$] No Ratings? No Problem – American Banker, March 11, 2011.
Congress Commissions Ratings Study
As a compromise between the House wanting to abolish the mention of credit ratings in the Federal register, and the Senate, who tried to become MORE involved in the ratings process, Dodd-Frank (DONK) commissioned a study. The regulators have a year to study and report back to Congress about their use of NRSRO ratings.
We support Chairman Frank’s efforts to strike the reference and official use of ratings. Ratings can’t be corrupt and useless, AND be the source of regulatory measurement.
The study should model its answer on the NAIC solution to PMBS:
- Ignore the rating
- Find a reliable third party to price the assets
- Publish the results.
The NAIC has already solved the rating problem, and it works. Let’s just copy that.
Agencies Issue Advance Notice of Proposed Rulemaking… – Board of Governors of the Federal Reserve System, August 10, 2010
The Effects of Reform
Filed under: Bond Regulation, SEC, The Rating Agencies
So, after protecting ratings as a First Amendment opinion, Congress changed the 2300-page regulatory reform bill and exposed the raters to legal liability if the ratings don’t reflect an ultimate change in the price of the bonds, or a default (crank up the class action lawsuit machine…).
What does this mean? Can a bond holder sue an NRSRO if the market value of a bond declines after a downgrade?
It means that this chills the value of a rating, if it exposes the rater to monetary liability. It seems there is a loophole, however.
If the rating was not part of the submitted OS or documents submitted to the SEC, the rating would be legally exempted, since it was not officially part of the submitted deal documents.
This is a stupid, populist nod to the worst of Congressional impulses. AT BEST, it will raise the cost of credit, and make it less available. AT WORST, it will put lawyers in charge of credit allocation.
What’s next, broker/ dealer stock buy and sell ratings? Will realtors be subject to legal liability if a house depreciates after you buy it? Will Las Vegas odds makers be subject to legal action if the odds are wrong and you don’t win?
The only good news is municipal bonds would be exempt because they do not have to register with the SEC.
Bond Sale? Don’t Quote Us, Request Credit Firms – WSJ.com, July 21, 2010
Ratings Agencies Take the Stand
Tune in to C-SPAN 2 to see the ratings agencies testify to the Financial Crisis Inquiry Commission.
Buffett wouldn’t voluntarily testify; he had to be subpoenaed.
With this many witnesses, expect lots of written/read testimony, some Congressional grandstanding and little discovery.
Here is the lineup (no pun intended):
Session 1: The Ratings Process
Eric Kolchinsky, Former Team Managing Director, U.S. Derivatives, Moody’s Investors Service
Jey Siegel, Former Team Managing Director, Moody’s Investors Service
Nicholas S. Weill, Group Managing Director, Moody’s Investors Service
Gary Witt, Former Team Managing Director, U.S. Derivatives, Moody’s Investors Service
Session 2: Credit Ratings and the Financial Crisis
Warren E. Buffett, Chairman and Chief Executive Officer, Berkshire Hathaway
(Mr. Buffett has elected to provide written testimony)
Raymond W. McDaniel, Chairman and Chief Executive Officer, Moody’s Corporation
Session 3: The Credit Rating Agency Business Model
Brian M. Clarkson, Former President and Chief Operating Officer, Moody’s Investors Service
Mark Froeba, Former Senior Vice President, U.S. Derivatives, Moody’s Investors Service
A History of Credit Ratings
Filed under: Bond Regulation, The Rating Agencies, The Ratings System
Dennis Berman gets it right in today’s WSJ. We have institutionalized the use of credit ratings and mandated their use in regulation to the degree that it has been allowed to replace individual due diligence. It is convenient for individuals, fiduciaries and politicians to pile on the ratings agencies and attribute all sub optimal economic outcomes to the “incompetent” ratings agencies. Everybody has a scapegoat, and the power of the Federal government is bearing down hard on the NRSROs.
Berman makes a good case for knowing the history of ratings before we try and implement a solution.
We should also know what ratings measure. There is a huge gap between what a rating measures and what the general public (and Congress) thinks it measures. There is also a huge problem in using a single obligor ratings system in a multiple obligor security sector.
We have two choices:
More government involvement (the Al Franken Plan): Otherwise known as the “how is that working out so far” solution…
Or
The logical conclusion: De-certify the NRSRO designation, remove the references to ratings from the Federal statutes, and let caveat emptor rule.
If you don’t know what the credit “worthiness” of a bond of an asset is, don’t buy it. If you have an investment manager or a fiduciary representing your interests, it is their responsibility to understand underlying credit. This will let the market establish the usefulness of Credit Ratings Agencies and the concerns of ratings shopping without government involvement or any additional regulation.
We have to know the history of ratings, NRSROs and the mis-application of a ratings system architecture to a modern structured finance asset class. The Franken solution will raise the cost of capital and make it less available. The elimination of the NRSROs will let investors be responsible for their own decisions.
The Credit Raters: How We Got Here – Wall Street Journal, May 25, 2010
LeMieux Responds to Franken
The Al Franken amendment added more government involvement in the NRSRO space, and added a layer to getting a rating on a securitized asset. This will make credit more expensive and less available.
Thankfully there is SA 3774, the LeMieux amendment that passed in the Senate, which strips the references of ratings from the federal register. This mirrors the language in the House/Barney Frank Financial Reg. Reform bill, but should become effective now.
Completely removing reference like the House version helps, but then regulators shouldn’t hold financial institutions hostage to a discredited rating.
It is logically inconsistent for the ratings to be useless and the foundation of regulatory credit analysis.
[$$] The Credit Raters Brawl – WSJ.com, May 14, 2010
Franken’s Progress?
The Franken amendment put the SEC in charge of assigning who rates what deal.
Is this progress?
Let’s use the system we have in place.
After all of the trouble and doubt we have been through, let’s have the investor be responsible for his investment decision. If the NRSROs are so corrupt, and the ratings so valueless, they will be out of business without government involvement.
This will guarantee a slowdown in credit creation and make it more expensive in the middle of a recession.
If we are trying to prevent “ratings shopping,” this isn’t the way to do it.
Is there any problem that can be solved without government intervention? ANY?
Senate Passes Plan Aimed at Eliminating Credit Rating Conflicts – Bloomberg, May 13, 2010
