CMBS by any other rating
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Whatâ€™s in a AAA-rating, anyway? Nathaniel Popper writes in Dealbook that Standard & Poorâ€™s, the nationâ€™s largest ratings agency, is winning major business by giving out higher ratings than its rivals on commercial mortgage-backed securities. This is, indeed, the same company currently being sued by the government for defrauding investors by intentionally applying inaccurate ratings to mortgage-backed securities.
The ratings agencies have an incentive to artificially inflate ratings because many investors, like pension funds, foundations, and endowments, can only invest in securities with an investment-grade rating. The banks that issue the securities also hire the ratings agencies, thus top-flight ratings that help the banks easily sell the securities lead to more business for the likes of S&P.
Furthermore, all of the agencies — S&P, Moody’s Investors Service, and Fitch Ratings — compete against each other to rate the same bond issuances. â€śImagine the pharmaceutical industry having six FDAs, all competing to approve drugs. Everyone would be dead,â€ť Rob Dobilas, who founded rating agency Realpoint LLC, told Bloomberg back in May.
Matt Levine, however, questions whether S&P adjusting their ratings upwards necessarily means it intended to drum up extra business. Theoretically, S&P was just trying to make its ratings more like the ratings of its peers:
If youâ€™re more lenient than your competition, and adjust to be in-line, everyoneâ€™s more or less fine with that, but if youâ€™re stricter than your competition, and adjust to be in-line, everyoneâ€™s all â€śyouâ€™re lowering standards to win business because youâ€™re corrupt!,â€ť which is just a category mistake, thatâ€™s not a corruption in the ratings agency business, that is the ratings agency business.
S&P sent a letter to the editor of the New York Times, charging that the article misrepresented the difference between S&Pâ€™s ratings and those of its competitors, which Quartz received in an email. The agency writes that â€śbased on the dollar value of the transactions cited by The Times, 97% of the CMBS S&P has rated since changing its methodology were rated the same as or lower than other rating agenciesâ€ť.
On to todayâ€™s links: