Thursday, June 5, 2008

Rating Agency Follies

"Bond insurers MBIA Inc. and Ambac Financial Group Inc. landed back on the hot seat Tuesday, as Moody's Investors Service said mounting losses are raising fresh questions about whether they deserve their key triple-A insurer ratings. ... Losses on complex securities backed by mortgages are now meaningfully higher than the rating agency's prior expected-case losss estimates, elevating existing concerns about capitalization levels relative to the AAA benchmark,' Moody's said in a news release", WSJ, 14 May 2008.

"Moody's Corp.'s Moody's Investors Service and Fimalac SA's Fitch Ratings acknowledge they have switched analysts assigned to rate bonds after receiving requests to do so from bond insurers or their bankers. Changes usually were made after a specific bond was rated, meaning the analyst wouldn't work on the bond insurer's next deal, according to current and former officials at the credit-rating firms. While switching analysts appears to be infrequent, there are situations 'where an analyst doesn't get the message that you're expected to be responsive,' Bill May, a Moody's managing director said in an interview. ... The little-known practice could spur even more questions about whether bond insurers have too much influence over how their bonds are rated before being sold to investors. ... Lawmakers and regulators are weighing new rules to beef up analyst independence. ... Moody's ... is investigating reports it tried to cover up a bug in its computer models that caused Moody's to overrate securities known as constant-proportion debt obligations or CPDOs. ... Another mortgage analyst at Moody's was moved to the firm's surveillance unit after a Moody's official agreed with an investment banker's opinion that the analyst was too fussy, a person familar with the situation said. ... 'Wall Street is not switching our analysts,' a Moody's spokesman says. 'Moody's makes decisions based on the best interest of the rating.'," my emphasis, WSJ, 23 May 2008.

This is a joke. Moody's should never have rated these entities AAA as soon as they began insuring CDOs, CPDOs, etc.

Hey Bill May, what does "doesn't get the message", mean? That the analyst did what he thought was his job, i.e., to be objective, then found out his job was to "get the deal done"? Rules and regulatory actions nothwithstanding there are few substitutes for lawsuits and indictments. If Mike Garcia wants to do something for investors, he should he handing out indictments by the dozen. This Moody's fiasco reminds me of the Marv Roffman (MR) incident of 1990. The story was reported in Barron's. MR was an analyst working for Janney, Montgomery Scott (JMS). He wrote a report about the Trump Taj Mahal (TTM) that Donald Trump (DT) disliked. DT complained to JMS, which fired him. The TTM eventually went bankrupt just as MR predicted. MR won a $750,000 arbitration award from JMS and got a settlement rumored to be $6 million from DT. Did the SEC learn anything from the MR incident? Apparently not. See my 6 October and 28 December 2007 posts.


Edgar Alpo said...

SEC "dismayed" at insider trading.

Mike said...

It does make you wonder about the relationship between issurers and the insurors, since the insurors are dependant on them to bring business. I wrote a post yesterday about how most insured bonds are trading on their underlying credit.