Friday, November 19, 2010

Meredith Whitney and the Future of Credit Rating Agencies

The popular media are harping on the wrong issue in respect of the future of the credit rating agencies. They say that despite financial overhaul aimed at reducing their influence, “credit raters keep their power” (WSJ Nov. 16) and that “[for] potential newcomers, … , it is difficult to compete against established agencies [like Moody’s and S&P].” (FT Nov. 19)

Rather, the regulatory proposals in both the U.S. and Europe have been quite severe on the rating agencies, demanding both improved transparency and enhancing transparency, which increasing the potential for legal liability; and the very reason that players like Kroll and Meredith Whitney are entering the rating environment is that the established agencies are particularly vulnerable to competition.

To be fair, it is always a challenge to compete against a well-established company. But Kroll and Whitney are seizing the opportunity while the raters are weakened by poor ratings performance, and distracted by the significant increase in both the “volume and cost of defending such [related] litigation.” - from Moody’s (MCO) 10Q

Ratings, as we all know, are interwoven throughout our financial framework. It takes time to remove references to them and there remains a modicum of inertia among market participants in moving away from the Big Three or away from credit raters in general. But there has been a tangible change in momentum, with raters like Canada’s DBRS having already secured a large (majority) share of the U.S. residential mortgage-backed securities (RMBS) market — hardly a sign of “difficulty competing.” (WSJ May 2010)

Rather than being anxious about seeing immediate changes despite the lengthy history, and deeply embedded nature, of credit ratings, we urge the media to rather applaud the substantial regulatory improvements that have been made in respect of reducing reliance on ratings and heightening the integrity of the ratings process. We caution, however, that a material increase in the number of rating agencies leads to greater competition and not to higher quality ratings. More accurately, the readier the supply of ratings, the higher the inflation of ratings provided.

(1) Aside from the 11 SEC approved NRSROs, there are already according to our calculations 108 other debt rating companies worldwide, 18 of which are affiliated in some way or other with one of the NRSROs.
(2) To visit submissions to the SEC, including our submission, on the credit rating reform proposals put forth in the Dodd-Frank Act, click here.


Indian T.v Serials said...

The CRA's are big business and the democrats have attack dogs and trying to pull out a election this November. Note the head of the investigation is the prior State Treasurer of California. Talk about the pot calling the kettle black. CRA's are not buy recommendation but just a tool. If you are a big guy you should do your own ratings, not blame the CRA's.

There are no sure bets in this world!

Asian Tv said...

An article came out on 11/15 about Marisco Capital regarding their debt structuring. Marsico is the largest holder of ETN stock according to what i read on the yahoo website. GS put ETN on their conviction buy list around the time the article for Masico came out. When I google the name Masico and GS- there are several articles. What does this all mean? Will Masico have to liquidate its position in ETN and will this affect GS? Does anyone know the answer

Play Online Games said...

If having a flawless record is the prerequisite for qualifying as a bond ratings agency, the likes of Moody’s and Standard& Poor’s should have closed down their lemonade stands and crept out of town years ago. The real question is why the entire ratings industry gets paid by those it rates. Talk about a red-light district.

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