Comments on: How will Mary Schapiro fix the ratings-agency mess? A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: shrivti1 Sat, 24 Jul 2010 17:50:48 +0000 Felix,

I’m not sure I follow you on your reading of 436(g). The rule did much more than just allow issuers to use ratings in their prospectuses, because the reason “permission” was not needed was because 436(g) exempted ratings agencies from being held to a standard of negligence for their work in a court of law.

Many, many, many lawsuits against the agencies are immediately thrown out of court without being heard because the suits allege negligence, and the courts cite 436(g) as the reason that the case cannot even be heard.

So in a narrow way, you are correct. But the way you phrase it kind of misses the point. The regulation was specifically designed so that ratings agencies couldn’t rate garbage SF transactions without doing what would pass as due diligence in a court of law.

I’m not surprised at the agencies’ reaction; however, given that a huge amount of their revenue stream comes from rating SF products, I think this is more of a game to see who blinks first. There’s no way that agencies will risk losing the SF market in the long term. Instead, they’ll just have to deal with the legal uncertainties.

And if garbage SF transactions don’t get rated, well, good. That’s the whole point.

By: Gennitydo Fri, 23 Jul 2010 02:50:35 +0000 Felix, I don’t think your suggestion on forward-looking statements is feasible any more. Dodd-Frank specifies that statements made by credit rating agencies are not forward-looking statements for purposes of the Exchange Act’s Section 21E safe-harbor. So this is no longer within the purview of the SEC.

By: willid3 Fri, 23 Jul 2010 00:52:48 +0000 the theory behind the rating agencies was that they were a supposedly disinterested third party. because the sellers have an interest in selling useless rocks if given the opportunity. and some buyers (banks, pensions, stock funds, 401k firms, and others) aren’t really all that interested in just how good what they buy is on occasion. the rating agencies were suppose to keep them honest. but some where along the line this formula for private protection broke down

By: CDNrebel Thu, 22 Jul 2010 21:23:18 +0000 I have trouble understanding why a credit rating agency has anymore sway than an analyst that does his homework, unless the rators have some secret formula that determines what a rating should be that others would not be a party to. I’m not sure how we fix the problem, because any fix seems to bring about a whole mess of it’s own problems. Perhaps threat of litigation is the only way to keep ratings people in check…

By: FosterBoondog Thu, 22 Jul 2010 20:36:35 +0000 The language of AB 1120 is remarkably clear for legalese (which probably means I don’t understand it…). It doesn’t say that the ratings must be disclosed. It says that if the sale of a tranche is CONTINGENT on achieving some rating level, that fact must be disclosed, as well as what that minimum rating is and what company provided the rating. It sounds like a weak attempt at forcing disclosure of when deals have been contrived to get, say, AAA for the senior tranche – as happened with so many subprime deals, with the rating agencies disclosing their methodology to the dealers so that the dealers could cook the deals to order (by finding the holes in the rating models).

Here’s the full text:

§ 229.1120 (Item 1120) Ratings.
Disclose whether the issuance or sale of any class of offered securities is conditioned on the assignment of a rating by one or more rating agencies, whether or not NRSROs. If so, identify each rating agency and the minimum rating that must be assigned. Describe any arrangements to have such rating monitored while the asset-backed securities are outstanding.

By: MattJ Thu, 22 Jul 2010 20:34:58 +0000 Even if they accept their increased liability, won’t they need to understand the limitations of that liability before they can figure out how to price it? No one was expecting that they would accept that liability without charging more for their services, were they?