Fun with Ratings Agencies

[TJ_98370]

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This development should be no surprise for anyone who has been following the chaos surrounding mortgage backed securities lately .... and maybe the lawsuits alleging misrepresented risk were additional motivators?

From Calculated Risk --



Moody's is throwing out some possibilities for changes to its rating system that would give more information to bond buyers, and is inviting comment from the investment community.....

.....Here are the proposed options, from Moodys' request for comment:

1. Move to a completely new rating scale for structured securities, for example, numerical rankings of 1-21. These would continue to contain ordinal rankings of expected credit risk and would probably map to corporate ratings.

2. Add a modifier to all structured ratings utilizing the existing rating scale, e.g., Aaa.sf. This would designate the issue as structured, but add no other additional information.

3. Add a suffix to the existing rating scale for structured ratings that contains additional information – for example, estimates of multi-notch rating transition risk. This could be Aaa.v1, Aaa.v2, etc. We would derive these gradations through an analytical process that would be disclosed to the market.

4. Use the existing rating scale for structured securities, and put additional analytical information in a separate scale that would exist in a separate data field. For example, an issue could have a "Aaa rating, with a ratings change risk indicator of v1". The added field would be analogous to our existing ratings outlooks and watchlists.

5. Make no changes to the rating scale, but provide additional information and commentary through written research.
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[TJ_98370]

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NEW YORK/LONDON (Reuters) - Standard & Poor's unveiled an overhaul of its ratings process on Thursday, responding to widespread criticism of the quality and accuracy of credit ratings.

S&P, a unit of McGraw-Hill Cos, announced 27 steps that it said would boost confidence in credit ratings. It came on the heels of planned reforms announced this week by its major rivals, Moody's Corp's Moody's Investors Service and Fimalac SA's Fitch Ratings.

Ratings agencies have come under fire from regulators and investors who say they helped precipitate the U.S. subprime mortgage crisis and credit tightening that began in 2007.

"The supposed reforms announced today by Standard & Poor's and by Moody's on Tuesday are too little, too late," New York state Attorney General Andrew Cuomo said in a statement. "Both S&P and Moody's are attempting to make piecemeal change that seem more like public relations window-dressing than systemic reform." He pledged to continue investigating their roles in the mortgage crisis.

Critics say the agencies at first assigned high ratings to hundreds of billions of dollars of securities linked to low-quality debt, only to exacerbate market turmoil by later rapidly downgrading many of those same securities.

This has contributed to write-downs piling up in the financial industry, hurting stock prices and causing losses in a variety of pension and mutual funds........

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Feb. 7 (Bloomberg) -- New York Attorney General Andrew Cuomo said ``supposed reforms'' by Standard & Poor's and Moody's Investors Service, which gave high ratings to subprime debt that later plummeted, won't stop his investigation of the companies.

``Both S&P and Moody's are attempting to make piece-meal changes that seem more like public relations window dressing than systemic reform,'' Cuomo said in a statement today, calling the reforms ``too little, too late.''

Cuomo plans to focus on ``the role played by the ratings agencies in the mortgage meltdown,'' he said in the statement. The companies and Fitch Ratings have been scrutinized by regulators and lawmakers for giving high ratings to subprime- mortgage securities that subsequently sank in value and for reacting too slowly as defaults rose.

Cuomo subpoenaed S&P, the world's largest credit rating service, and Fitch Ratings in September as part of his mortgage probe. S&P is responding to the subpoena it received in September and is ``interacting with the attorney general's office,'' S&P spokesman Steven Weiss said.

Cuomo has power under state securities law to proceed against the companies or their executives through civil lawsuits or criminal charges.

S&P announced earlier today what it called ``a broad set of new actions'' to strengthen its ratings. Moody's, the second- largest credit-rating company, said this week it was considering a new rating system, based on numbers.......

[deejayoh]