Another Tobacco "Deal"

"The three major bond-rating firms are set to overhaul the way they collect fees as part of a settlement with New York State's attorney general, Andrew Cuomo. ... Under the Cuomo settlement, which would cover the hardest-hit portions of the mortgage-market, the firms would get paid for their review, even if they didn't end up getting hired to rate the deal. This would mean the firms would get paid even if they were tough. .. The settlement is unlikely to satisfy critics who have urged that bond-rating firms stop being paid altogether by bond issuers or that the firms be permitted to rate any deal they choose, regardless of the whether the issuer cooperates. ... The decision not to seek fines from the three major bond-rating firms ... shows [Cuomo] believes investor confidence can be shored up without an all-out attack on the bond-rating industry", my emphasis, WSJ, 4 June 2008.

"An agreement between New York state Attorney Geneal Andrew Cuomo and the three major bond-rating firms will overhaul the way they collect fees and aims to improve the way mortgage-backed securites are rated. ... Moody's Corp. Chief Executive Raymond McDaniel, at a separate briefing, said the settlement is a 'very constructive development' for bond-rating firms and an 'important step' for 'restoring confidence' in the credit markets. ... Mr. Cuomo's settlement ... does deal with what many critics say has been a chronic problem with bond ratings: They are paid for by the entities being rated. ... Under the accord, the firms would get paid for their review, even if they aren't hired to rate the deal. That is designed to make ratings firms less reliant on getting the ratings assignment from bond issures. Ratings firms will also have to disclose the fees they collect in these securities. ... The settlement also requires that rating firms review due-diligence reports on loans that go into the securities in an effort to better equip them to understand what is in the mortgage securites they are rating. ... Christopher Cox, chairman of the [SEC] said in a statement: 'I am most appreciative of the efforts of the Attorney General Cuomo and his staff to consult with the Commission and coordinate their efforts in a way that is consistent with the Commission's pending rulemaking for credit-rating agencies'," my emphasis, WSJ, 6 June 2008.

This deal stinks. It will not fix the ratings agencies. See my 10 June 2008 post, Bert Ely's got the right idea. The "deal" reminds me of the tobacco industry "settlement", that cost the tobacco industry nothing, but cartelized it. Few people understand the tobacco industry deal was in substance, a group of state attorneys general levying an excise tax on cigarettes. I remember reading a good analysis of the deal by a Stanford University law professor in the WSJ.

There is nothing in Cuomo's settlement for investors. Consider McDaniel's comment, it's a "very constructive development" for Moody's. I agree, McDaniel, that's exactly why it's of no help to investors. Further, the defender of investors' interests, Chris Cox endorsed it. 'Nuff said.