Thursday, August 14, 2008

Rating Agency Update

"Standard & Poor's Ratings Services pushed back against [SEC] proposals to revamp how bonds are rated, in another sign of the resistance from Wall Street to efforts to overhaul financial markets. ... In a 33-page letter, the largest bond-rating company by revenue also suggested relaxing a gift ban the SEC has proposed as a way to improve independence. The SEC rule would effectively ban rating-company analysts from accepting gifts worth more than $25 from issuers. ... As expected, S&P also opposed the SEC's idea of requiring a disclaimer on structured-finance bond ratings", Aaron Lucchetti at the WSJ, 28 July 2008.

"Problems keeping up with the surging growth of mortgage-related debt products were particularly acute at Standard & Poor's Rating Services, according to a draft version of a [SEC] report on bond-rating firms. ... Some of the most strongly worded emails from analysts questioning their own ratings came from S&P, according to a draft version of the 38-page report, which includes the firms and was reviewed by the [WSJ]. ... In an email, an S&P analytical stafffer emailed another that a mortgage or structured-finance deal was 'ridiculous,' and that 'we should not be rating it.' The other S&P staffer replied that 'we rate every deal,' adding that 'it could be structured by cows and we would rate it. ' ... The draft report could trigger more scrutiny of how each bond-rating firm did business during the credit market's boom and bust, including how they dealt with conflicts of interest and other issues affecting the accuracy of ratings. ... But satisfying Wall Street issuers also crept into the process. 'We are meeting with your group this week to discuss adjusting the criteria for ratings CDO's of real estate assets ... because of the ongoing threat of losing deals,' S&P commerical mortgage analyst Gale Scott wrote to colleagues in August 2004, according to the draft report and a person familiar with the situation", Aaron Lucchetti at the WSJ, 2 August 2008.

"'What we do is provide access to the capital market,' Mr. [Harold] McGraw responded. 'If the market wants those kinds of products and the institutional investors want those products, then we move with the market and we're going to rate whatever.' The comment got little notice at the time [October 2007]. But it helps to explain why S&P, its parent company and Mr. McGraw now are in a pickle. ... In the mid-1990s, Frank Raiter, then an S&P executive working in residential-mortgage ratings, proposed using more sophistiated models to predict how mortgage loans would perform. Mr. Raiter wanted to pitch the modeling product to big market participants such as Fannie Mae and Freddie Mac. ... Building market share in existing and new products also got lots of attention. ... In March 2007, Mr. McGraw described CDOs as a 'high-quality' market, as shown by the high number of triple-A ratings S&P had assigned to them", my emphasis, Aaron Luchetti at the WSJ, 2 August 2008.

This "independence" stuff is a joke. It never stopped CPA firms from bending to their clients wishes, why will it improve the rating agencies (RA) work? The notion a "gift" would more influence an analyst's work more than the fee his firm will or will not receive is preposterous. The SEC's proposed gift rule is just more window dressing.

The RA suffer from all the problems the Big 87654 firms do. I say, sue away. That's the only way to fix them.

Yes, McGraw, and to do your job properly sometimes you must shut the door. McGraw is so clueless he thinks S&P's giving CDOs a lot of triple-A ratings meant they were in a "high-quality" market. Now we have reason to believe that S&P did not commit fraud when it rated all those CDOs, it just didn't know what it was doing, fool not knave.

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