ratings agencies

There are apparently companies without the resources to buy triple-A credit ratings from the Big Three. A little fourth has arrived to help, but plans to studiously avoid stepping on larger incompetent toes. Read more »

Fact: The Big Three perhaps maybe haven’t done the best job rating bonds, sovereign or otherwise.

Fact: Powerful governmental bodies aren’t especially happy with some of those ratings, even if they were indisputably right.

Conclusion: Kick’em while they are down. Read more »

  • 01 Aug 2013 at 11:44 AM

Bond Rating Agency Decided To Try To Rate Some Bonds

What does a AA credit rating mean? The intuitive answer is something like “it means that the rating agency rating the thing thinks it has a probability of default no higher than X% and no lower than Y%,” where X and Y are the boundaries of AA- and AA+ respectively, and sure, that’s about right. But there’s an important loophole there which is that each rating agency can set X and Y to be whatever they want. I can make AA a ~1% probability of default, and you can make it ~20%, and no one can tell us who’s right and who’s wrong, because it’s just some letters, y’know? There’s no a priori relationship between those letters and any particular probability of default.

That seems sort of odd, so Congress in the Dodd-Frank Act directed the SEC to look into standardizing the relationship, and the SEC looked into it, and in 2012 they came back to Congress and said no dice. Because basically everyone – ratings agencies but also issuers of and investors in bonds – preferred the current non-standardized system where ratings agencies just rate bonds however they want.1 Read more »

  • 21 Jun 2013 at 5:01 PM

Congressmen Have Some Advice For Ratings Agencies

The ideal financial regulatory regime would go like this:

  • Regulators would tell market participants not to screw up.
  • Market participants would not screw up.
  • Peace and harmony would reign throughout the land.

This is ideal not only because of the peace and harmony but also because it omits any work by the regulators. Why choose whether to set capital ratios based on risk-weighted or total assets when you can just tell banks not to lose any money? If they never lose money then it doesn’t matter how thinly capitalized they are.

These guys know what I’m talking about: Read more »

Would you have predicted this?

This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries.

I would not have! Perhaps I am biased from living in a country where credit ratings are a contrary indicator of sovereign interest rates, and where municipal defaults inevitably lead to helpful comments from ratings agencies like “If the payment doesn’t get made, we would downgrade the rating.” Apparently, though, sovereign ratings matter, at least in Europe and at least at some points on the ratings scale.1 Read more »

You don’t have to agree with everything the SEC does to respect the way they do it: passive-aggressively. Felix Salmon this morning discussed “the problematic JOBS Act, where the SEC has done a good job of stalling on various silly yet Congressionally-mandated reforms,” and the SEC’s similar strategy of “being sensible and dragging its feet” on Congressional dedecimalization proposals. If you’re a regulatory agency tasked by Congress with implementing a new law, and you don’t feel like it, the best approach is always to commission a study.

Is that what’s going on with ratings agency reform proposals?

The 2010 Dodd-Frank financial-overhaul law requires the SEC to create a board that would assign a rating firm to evaluate structured-finance deals or come up with another option to eliminate the conflicts that could arise when debt issuers pay rating firms to rate their bonds. … Sen. Al Franken (D., Minn.) proposed the legislation, which is known as the Franken Amendment.

… Mr. Franken defended his proposal Tuesday to attendees at the round table, including SEC commissioners and SEC Chairman Mary Jo White. He also called on the agency to make changes to the credit-rating industry.

“My plea today is that you take action,” Mr. Franken said. “Millions of Americans lost their jobs because the credit rating agencies didn’t do their jobs,” he said.1

The agency published a report in December – six months late – that was widely expected to announce regulatory changes. Instead, the report proposed more discussion and the convening of a round table.

So hahahaha SEC you suck but the problem seems genuinely hard doesn’t it? Read more »

Bloomberg has a delightful story today about a new JPMorgan RMBS transaction, its first non-agency deal since the crisis. Specifically about this:

The bonds are made riskier by the New York-based bank and other originators of the mortgages offering weaker promises to repurchase misrepresented loans than those on similar deals, Fitch Ratings said today in an e-mailed report. Lenders and bond sponsors have been seeking to trim potential liabilities in such deals as the market revives after suffering billions of dollars of losses from debt sold before the collapse in home prices.

The value of the so-called representations and warranties in the JPMorgan transaction is “significantly diluted by qualifying and conditional language that substantially reduces lender loan breach liability and the inclusion of sunsets for a number of provisions including fraud,” New York-based Fitch analysts including Roelof Slump wrote in the presale report.

So naturally the deal is limited to an Aa rating, as it would be at Moody’s based on those sort of rep and warranty weaknesses, right? Errr not so much:

The classes of the deal expected to receive top credit ratings carried loss buffers of 7.4 percent as Fitch said it adjusted its analysis to reflect the greater investor dangers created by the weaker contracts, according to the report.

So 92.6% of the deal will be AAA rated at Fitch and Kroll, the other rating agency on the deal. Here’s the cap structure from Kroll’s report: Read more »