Friday, May 13, 2011

Adverse Selection? No Problem!

A section from their rating methodology piece "Moody’s Approach To Rating U.S. Bank Trust Preferred Security CDOs" describes its procedures for ensuring the quality of bank preferreds being bought by CDO managers (S&P / Fitch have something similar). The section reads:

"In order to control for [adverse selection of banks by the arranger of CDOs], Moody's takes a four-step approach for banks that are not rated by Moody's.

First, each bank should satisfy the following prescreening attributes:
  • Financial Institution insured by the Bank Insurance Fund or Saving Association Insurance Fund.
  • Five years minimum of operating history.
  • Minimum asset size of $100 million.
  • Not under investigation by any regulatory body.
  • No restrictions placed on its operations by any regulatory body."
[additional steps omitted in the name of brevity]



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