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Rating Agencies on Strike

posted by Adam Levitin

I thought that this story about the rating agencies' response to the financial reform bill received far too little attention. The rating agencies are refusing to rate until and unless they are relieved of their newly acquired liability for their ratings. In the meantime, the ABS markets can't function, which hurts not only the rating agencies, but also ABS issuers. Clearly the rating agencies are counting on the issues to plead their case before Congress. Smart strategy.  

We're going to see a lot of examples in the next couple years of industries in turmoil because of Dodd-Frank. I don't think Congress really worked through all of the rating agency issues thoroughly enough; it's clear that there's a problem, but finding the right solution is much more difficult. 


What's the problem? Holding financial companies to the same standards we've held for nonfinancial companies for the past century?

Oh, yeah, I forget. If you're a financial company, you get to keep the upside but shove the downside on innocents.

If the banks care about attracting investors, especially foreign investors, they will tell the rating agencies to suck it up.

Obviously, some form of accountability for the rating agencies is too much.

Anyways, doesn't this in some way help banks - at least those banks that have implemented Basel II - (though not the market) because assets which go unrated may be weighted at 100% whereas distressed assets have to be weighted at 150%... sort of a joke because I am sure it doesn't make any difference, but interesting to think about nonetheless!

Wow, you mean the issuers and agencies have to engage in real price discovery/allocation of risk??? Somebody please call the waaaaa-mbulance.

I give their political strategy a AAA rating. Now, where's my hundred bucks?

Well there are consequences to making laws with too broad a focus. Sure something needs to be done to make ratings agencies more accountable - but perhaps the law should focus on defining egregious misconduct on part of the agencies and then penalize them for those accordingly.

Making agencies liable for, effectively what are, predictions gives them a choice between earning lower revenues by evaluating only those deals that possibly cannot fail(and so ironically maybe may not even benefit much from a rating) and getting wiped out due to liability relating to some incorrect predictions - which one would a rational company choose.

$100 ?!?! You're selling yourself waaaay short there Transor. Careful with that, you'll have everyone looking to YOU for potential ratings now.

"S&P, Moody's, Fitch cost way too much! For those high score credit ratings that your bottom scraping RMBS and CDOs need to survive in this market come on down to TranZ Credit Rating and Recycled Belly Button Lint distributor! Triple A ratings never cost so little!!"

Apologies. I think there was too much sugar in my coffee this morning....

The SEC has responded by allowing issuers a six-month break from having to file ratings from the credit rating agencies when they file their deal documents with the SEC. See http://www.businessweek.com/news/2010-07-23/sec-grants-six-month-delay-on-asset-backed-ratings-disclosure.html

I guess the SEC is willing to see if the rating agencies will miss the business more than the markets will miss the ratings from the agencies.


Holding toxic assets for yourself or somebody else (Hi Ben!)? Call the Rating Raiders!

Got any thinly traded, hard to understand paper? Liquidity is over-rated! Call the Rating Raiders!

There's no such thing as junk in a Free Market!

Call the Rating Raters 1-800-AAA-AAAA
"Nobody do diligence like we due diligence."

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