Check and Double Check

November 2, 2009 by · 1 Comment
Filed under: Bond Regulation 

The SEC recently decided that the rating agencies must reveal more information on past ratings so that investors could compare relative performance. This will be helpful to see whether there is a pattern of preference given one issuer over another. But this will only lead to supposition. Is the issuer just very good at assembling low risk collateralized debt obligations, or are they receiving preferential treatment? We’ll never know.

What is probably more valuable to ensure ratings are justifiable is that the SEC has also ruled that raters must share the underlying data used to determine ratings.

This will establish three important checkpoints: First, competing agencies can offer unsolicited ratings for structured finance products, in essence creating competition to achieve the most precise assessment. Second, investors will be able to examine the underlying data to verify the ratings so rating agencies will be critical of their own work.  And third, if a bond does go south, investors will only have themselves to blame for failing to do their due diligence on their own behalf or their clients’. With full disclosure, raters could be relieved of liability. Caveat emptor!

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