Muni Changes in the Works?
Congress is mandating “best practices.” Should we be measuring munis like corporates?
I’m not sure upgrading all muni bonds during a recession is the best idea. We will have to see what the Senate version looks like.
Stay tuned…
[$$] Issuers Looking Closely at Rating Provision, The Bond Buyer, December 14, 2009
The Blame Game Continues
The Attorney General strikes again. Eight different lawsuits assigning blame away from Ohio State’s pension committees. Just enough fact, and plenty of assertion to make a suit look reasonable.
The ratings agencies KNEW the ratings were wrong, but “succumbed to the attraction of higher fees.”
Ohio’s AG , California’s AG , Connecticut’s AG, CALPERS.
15 YARDS FOR PILING ON………………………….
[$$] Ohio Attorney General Files Suit Alleging Collusion on ABS Ratings – The Bond Buyer, November 24, 2009
Passing the Blame
Ohio A.G. jumps on the bandwagon. This is called “assignation of blame.” This story isn’t complete. I want to know:
- What they bought?
- When did they buy it?
- Who did they buy it from?
If they really were taken advantage of, did they:
- Sue the broker?
- Fire the portfolio manager?
These days, unfortunately, as populism rages, and risk is somebody else’s problem, this guy might win.
S&P, Moody’s and Fitch Are Sued by Ohio Over Ratings – Bloomberg.com, November 20, 2009
OK, Agencies, Your Turn…
Filed under: Bond Regulation, Multi-Obligor Bonds, The Rating Agencies
Here is the “skin–in-the-game” clause for originators and ratings agencies. This helps to prevent the next crisis.
We still need clarification and common sense review of the real value of existing multi-bligor securities. The existing bonds that have been downgraded will probably never be upgraded. These assets will be a drag on bank capital for years (until they mature). We need to address the existing problem. We can’t let static rules set bank capital levels. Accounting should reflect economic activity, not drive it.
Let’s ask the NAIC how to fix this problem. They have it figured out (see below).
FDIC May Tie Underwriter, Rater Pay to Asset-Backed Performance – Bloomberg.com, November 19, 2009
Hooray for the NAIC!
The Insurance Industry regulators made their choice yesterday. To give insurance companies accurate values on the downgraded mortgage bonds they own, the regulators made the common sense decision to abandon a ratings-based system and use an expert third party to measure the true economic value of holdings. By using Pimco, the industry will prevent an unnecessary drain from insurance companies’ balance sheets.
This is a logical, and effective solution that proves that regulation can work.
Hooray for the Insurance Commissioners. They saw an unintended consequence, and repaired it using a market based solution.
Pimco Chosen by Regulators to Review Insurer Home-Loan Holdings – Bloomberg.com, November 18, 2009
Finally, Some Comprehension
Filed under: The Rating Agencies, The Ratings System
Hooray! The market is beginning to understand what the NRSROs have been doing.
The rating doesn’t speak to the magnitude of loss. The National Association of Insurance Commissioners (NAIC) are being proactive and not allowing downgraded bonds to suck all of the capital out of the insurance industry by year end.
We hope that the ratings agencies’ explanation, and clarification as to what the ratings do measure will become common knowledge.
There are bad bonds. But not all downgraded bonds are “toxic.”
[$$] S&P Gauges Bond Loss Potential on Morgages – Wall Street Journal, November 9, 2009
Congressional Debate Over Rating Agency Bill
Congress can’t help themselves.
They discovered that municipal bonds are rated differently than corporate bonds.
It’s true. The ratings scales are not equal. Muni ratings are much tougher than corporate bond ratings.
Politicians yell that the ratings agencies are unfair to municipalities, raising their cost of borrowing due to the unduly harsh ratings.
First of all, Congress can’t tell the NRSROs how to rate (what with all that pesky First Amendment language).
Secondly, should we be upgrading all muni bonds, right in the beginning of a recession?
The state of California has been the most vocal about this issue. Maybe they should work on improving their financial condition, instead of rigging the ratings.
House Democrats, Republicans Differ Starkly on Rating Agency Bill – The Bond Buyer, October 28, 2009
Reform Recommendations from Steve Forbes
I agree with Steve Forbes’s comments in the article below. I think he has a point.
Let’s have people be responsible for their own decisions.
Let’s have fiduciaries resume their roles.
As a matter of theory, I agree.
But is it practical to un-endorse the NRSROs and blow up the current ratings infrastructure?
Ratings are completely intertwined in the financial system. Whatever emerges to replace it would take time. What about the interim? For example: What would financial institutions and their regulators use to evaluate bond portfolios, next quarter? Without an NRSRO rating, are all bonds unrated? Are they then all “toxic”? Are they then all classified?
We have to repair the existing use of ratings, or throw them all out. But if we throw them out, we need something, some rules of the road to get us through the interim.
Rating Agencies? Still Subprime – Forbes.com, October 26, 2009
Legislation Update
Click here to read the latest draft of the Credit Rating Agency bill, “Accountability and Transparency in Ratings Agencies Act.”
Accountability and Transparency in Ratings Agencies Act
This describes how the NRSROs should operate, as well as how they should be organized and regulated.
Rating Changes for Insurance Industry?
This is news!
The insurance industry regulators have determined that MBS ratings do not reflect the economic value of securities. The NAIC is moving to use a metric that demonstrates that “toxic” ratings don’t have to mean “toxic” bond.
Instead of a blanket “toxic” label, the insurance regulators are asking the right question: How toxic?
Let’s count the dollars at risk, instead of using a broad rating value of “toxic.”
This move will more accurately reflect the value of portfolio holdings.
[$$] Insurers Take Step Away From Raters – Wall Street Journal, October 15, 2009
