Wednesday, April 8, 2009

The rating agency bailout

Posted on Financial Times Alphaville by Sam Jones:

Connecticut Attorney-General Richard Blumenthal makes a rather compelling point in this press release:

Attorney General Richard Blumenthal today announced he is investigating why
a Federal Reserve bailout program unfairly steers up to $400 million to the Big
Three credit rating agencies who helped create the economic meltdown by
overrating risky securities.

The attorney general also wrote Federal Reserve Chairman Ben Bernanke
asking him to revise the program to stop giving the three agencies an advantage
and assure that their seven smaller competitors can compete for the work.

What Blumenthal is talking about here is the provision in the Fed’s $1,000bn Term Asset Loan Facility (TALF) that mandates assets sold into the programme to be rated by two or more “major” NRSROs (Nationally Recognised Statistical Rating Organisations).

The CT attorney general’s gripe is that this will rather cement the existing monopoly of the big three agencies: Moody’s, S&P and Fitch, leaving the smaller, (and so far, less tainted) raters — A.M. Best, Dominion Bond Rating, Japan Credit Rating, R&I, Egan-Jones, LACE Financial and Realpoint — in the cold.

One presumes the rationale behind the Fed’s “major” specification stems from the regulatory guidelines that require NRSROs to have adequate staffing and resource levels to fulfill their obligations to satisfactorily rate some rather complicated products. That such arbitrary designations have failed miserably hitherto seems to be neither here nor there.

And indeed, the adequate resource/major NRSRO specification completely fails to address the very real problem facing rating agencies - if not all of Wall Street - that, in the words of Alan Greenspan: “the whole intellectual [risk-management] edifice collapsed in the summer of last year”.

No comments: