Agencies Must Face Suits

May 18, 2012 by · Leave a Comment
Filed under: General 

U.S. District Judge Shira Scheindlin has ruled to allow suits filed by King County, Washington, and Iowa Student Loan Liquidity Corp to proceed. They had invested in two vehicles, named Rhinebridge and Cheyne, that they complained the rating agencies, Fitch, Standard & Poor’s, and Moody’s collaborated in structuring and then gave a falsely high rating.

The investors had sued the defendants for negligence, negligent misrepresentation, breach of fiduciary duty, and aiding and abetting. Scheindlin allowed the plaintiffs to proceed with the negligent misrepresentation claims and dismissed the other three complaints.

In her opinion supporting her decision regarding Rhinebridge she wrote, “Plaintiffs have sufficiently alleged that the rating agencies possessed unique or specialized expertise, and that the rating agencies knew and intended that their ratings would be used by investors in deciding whether or not to invest in Rhinebridge.”

Scheindlin continued citing the investors’ complaint. “Regardless of their historical roles, the rating agencies did not merely provide ratings; rather, they were deeply entrenched in the creation and operation of Rhinebridge.”

This is a bad decision. What happened to the investors’ burden of due diligence? How can there be a breach of an opinion? Isn’t anyone responsible for their own decisions?

Chinese Agency Opens in Europe

May 16, 2012 by · Leave a Comment
Filed under: International 

The Chinese rating agency, Dagong, is opening an office in Milan. It is a joint venture with a private equity group, Mandarin Capital Partners.

The Italian business daily, Il Sole 24 Ore, reports that Dagong has hired former Fitch executive Marco Cecchi di Rossi to launch the start-up, and the office intends to apply for authorization through the auspices of ESMA by summer.

Initially, the office will have 10 analysts. They will oversee securities issued in France, Germany, Italy, and Spain. Within five years, they intend to have 30 analysts, a 5-10% market share, and a turnover target of 9 million euros.

Dagong assessments are currently not considered outside of China; the agency has been sharply critical of western nations’ sovereign debt, particularly the United States’. I’m sure we will get transparency from a Chinese rating agency.

“Taking on the little guy, but missing the big ones”

May 14, 2012 by · Leave a Comment
Filed under: SEC 

Jesse Eisinger of ProPublica, in an opinion piece that appeared in the New York Time’s Deal Book, was sharply critical of the Securities and Exchange Commission’s (SEC) suit against the small rating agency, Egan-Jones.

Relative to the Justice Department, Mr. Eisinger believes that the SEC is proud of their action. He likens this to “being proud that you’re the ‘Dumb’ of ‘Dumb and Dumber.’”

The suit, Mr. Eisinger writes, is essentially for filling out forms incorrectly.

“All told, the allegations [against Egan-Jones] seem especially paltry when compared with the disastrous performance of the rating agencies that matter — Moody’s and S&P. Egan-Jones’s ratings didn’t cripple the global economy.”

He continues, “The inescapable conclusion is that the S.E.C. is letting Moody’s and S. & P. officials walk free while pursuing Mr. Egan on minor technicalities.”

“This is your S.E.C., folks. It courageously assails tiny firms, and at the pace of a three-toed sloth.”

In his conclusion, Mr Eisinger speculates that, “Promising leads on other potential wrongdoings by [big three] credit rating agencies seemingly go to the S.E.C. to die.”

Pundit Mocks Rating Agencies

May 11, 2012 by · Leave a Comment
Filed under: General, The Rating Agencies 

Writing for CBS Money Watch, columnist Constantine von Hoffman wonders, “Why are ratings agencies still in business?”

He cites two examples. The first is Standard & Poor’s upgrade of Greece’s sovereign debt “from really, really, really bad to merely very, very bad.” He doesn’t believe that Greece deserves a better rating, particularly in light of the then pending Greek elections.

He writes, “On Saturday, Greece will hold national elections in which anyone favoring budget cuts will be lucky not to finish at the bottom of the Aegean Sea.” He also points that markets reacted to the upgrade by driving the yield on Greek Bonds up even higher.

The second example is how the recent downgrade of Spain’s sovereign debt was “shrugged” off by the markets. He explains, “investors have known for some time that the economy there is a train wreck.”

He concludes by pointing out, “the agencies didn’t just miss the boat on mortgage securities, they missed the whole ocean.”

New Open Source Government Bond Rating Tool

May 9, 2012 by · Leave a Comment
Filed under: General 

In a press release, Public Sector Credit Solutions and PF2 Securities Evaluations announced that they have released an open source framework for analyzing and rating government bonds.

The tool estimates the risk of default by assessing the likelihood of sovereign, state, and municipal bond issuers exceeding a user-specified fiscal threshold in any given year. This probability is then converted into a rating.

PF2 Consultant Marc Joffe explains that the tool’s objectivity is its greatest benefit. “Rating agency sovereign and muni bond groups do not take advantage of the power and objectivity of quantitative techniques, leaving their methodologies vulnerable to bias and inconsistency,”

The tool’s open source platform is also an advantage. Anthony Randazzo, Director of Economic Research at The Reason Foundation, commented, “An open source tool like PSCF is a great answer to complaints about rating agency transparency. By linking a government’s projected debt burden to its risk, the framework sends the right signal both to bondholders and policymakers.”

Researchers Find Rating Agencies Overrated

May 7, 2012 by · Leave a Comment
Filed under: The Rating Agencies 

Credit Business Management reports that a paper written by Dr. Mungo Wilson, Saïd Business School, University of Oxford, and Jens Hilscher, Brandeis University, asserts that credit rating agencies’ ability to predict default is overrated.

Dr. Wilson said, “Our research proves what many critics of credit rating agencies have been arguing for years — that the accuracy and informational value of corporate credit ratings is dishearteningly low. Ratings are not an optimal predictor of default probability. They explain little of the variation in default probability across firms and they fail to capture the considerable variation in default probabilities and empirical failure rate over the business cycle.”

The two researchers conclude that it would be more accurate and useful to separate default prediction from the measurement of systematic risk.

Default prediction data could be updated frequently and rapidly to respond to firm-specific news, while measures of systemic risk could be a combination of current credit ratings and aggregate credit conditions.

The full paper is available at: http://people.brandeis.edu/~hilscher/CreditRatings_HilscherWilson_Jan2012.pdf

Parliament Continues to Question Rating Agency Executives

May 4, 2012 by · Leave a Comment
Filed under: International 

The Treasury Committee of British Parliament conducted its third inquiry session with executives from the rating agencies, Fitch, Moody’s, and Standard & Poor’s.

The Financial News reports that the committee chair, Andres Tyrie, began questioning by asking Moritz Kramer, managing director and head of the sovereign ratings group at Standard and Poor’s for Europe, the Middle East, and Africa, if Standard & Poor’s had made a $2 trillion miscalculation in their rationale for downgrading the U.S. sovereign debt.

Mr. Kramer denied there was a mistake. Rather, he blamed the discrepancy on two models used to measure U.S. deficits in upcoming years. Mr. Tyrie’s follow-up question cited Finland’s AAA rating and asked whether the U.S. had less ability and willingness to pay its debt than this small sub-arctic nation.

Mr. Kramer essentially said that yes, he believed Finland to be a better risk than the U.S. and justified his opinion on the political turmoil in Washington.

The Financial News said that hostile questions and terse answers continued throughout the session.

Euro Rating Agency Gets Financial Backing

May 2, 2012 by · Leave a Comment
Filed under: International 

Reuters reports Markus Krall, a partner at Roland Berger Strategy Consultants, as saying, “Following intensive talks conducted across Europe, a number of financial companies have now agreed to support the establishment of a global rating agency of European origin.”

Mr. Krall anticipates that they will soon be concluding fundraising and beginning “operational realization”.

Mr. Krall will be resigning his senior position with Roland Berger to become the founding chief executive of the new agency.

During the Eurozone debt crisis, the American rating agencies, Fitch, Standard & Poor’s, and Moody’s were criticized by Europeans for being too quick to cut sovereign ratings despite bailouts and austerity measures.

The Bertelsmann Foundation is also attempting to launch a non-profit rating agency that would use a yet-to-be-developed model for rating sovereign debt.

Another Credit Rater Charged

May 1, 2012 by · Leave a Comment
Filed under: NRSRO 

D.C. still in the anointing of NRSROs.

Ratings matter, or they don’t.

The sad part is this wasn’t found during the application process.

So either the vetting was incomplete, or they saved this revelation to torpedo Egan.

You decide.

SEC Charges Credit Rater Egan-Jones – Reuters, April 24, 2012

SEC Takes Action Against Egan-Jones

April 30, 2012 by · Leave a Comment
Filed under: Uncategorized 

The Security and Exchange Commission (SEC) alleges that the small rating agency, Egan-Jones, made material misstatements in a 2008 regulatory application.

An attorney for Egan-Jones, Alan Futerfas, said that the agency intends to contest the SEC’s administrative charges.

Reuters quotes Futerfas as saying, “I think this does a significant disservice to the investment community. I think it is grossly disproportional to any possible error in any four-year-old application. And we intend to vigorously contest these allegations.”

The specific charges include misrepresenting the firm’s rating experience, conflict-of-interest policy issues, and a failure to keep certain books and records.

Egan-Jones has been quick to downgrade sovereign debt among established countries, including the United States. “Has Egon-Jones been targeted? Let’s hope not.”

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