Ratings agencies under fire over residential-mortgage-backed securities

Triple-A securities have fallen to mostly below investment grade

Sep 27, 2009 @ 12:01 am

By Darla Mercado

National ratings agencies re-ceived criticism Thursday at a meeting of the insurance industry for their failure to properly rate residential mortgage-backed securities prior to the crisis.

As part of the National Association of Insurance Commissioners' fall meeting last week, its ratings agency working group discussed the role of ratings agencies in regulators' evaluation of insurance companies, particularly after securities that were once Triple-A rated slumped to below investment-grade quality.

Insurers hold close to $3 trillion in rated bonds, and regulators depend on credit ratings to determine insurers' capital reserves.

State regulators said they would seek input from industry members on how they should use these ratings.

“It is clear the ratings agencies did not know what they were doing when they initially rated the [residential-mortgage-backed securities] issued from 2005 to 2007,” said Birny Birnbaum, executive director of the Center for Economic Justice.

Noting that most of those Triple-A rated securities are now below investment grade, he asked, “If the rating agencies did not know what they were doing a few years ago, why do we have any confidence that they know what they are doing today?”

Rod Dubitsky, executive vice president of Pimco Advisory, chalked up the ratings agencies' failure to their reliance on flawed third-party due diligence, the fact that structured finance analysts were too far removed from the business underlying the mortgage loans to detect the coming catastrophe, as well as limited incentives for the ratings agencies to be more conservative.

He advocated requiring the agencies to to provide more extensive disclosure of their methodology and subjecting them to increased regulatory oversight. An accurate definition of a Triple-A rating is also necessary, he said.

Representatives from the major ratings agencies acknowledged the public's poor impression of how structured securities were rated, but they also noted that credit ratings should hardly be used alone as a benchmark for regulators.

“While much of the recent difficulty in these markets has related to the price of these securities — a factor that ratings do not and are not intended to address — defaults and ratings volatility have been much higher with these securities than we anticipated or intended,” said Grace Osborne, managing director and lead analytical manager for North American insurance ratings at Standard and Poor's Ratings Services. “We have been disappointed — and we understand that the market has been disappointed — with the extent of volatility in this area,” she said.

Nevertheless, Ms. Osborne said S&P has made improvements, including establishing an ombudsman to address possible conflicts of interest and implementing “look-back” reviews to confirm the integrity of ratings when analysts leave the firm to work for an issuer.

E-mail Darla Mercado at -dmercado@investmentnews.com.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Female leaders highlighted as future of financial advice

InvestmentNews recognized 20 Women to Watch for their efforts to advance the financial advice industry.

Latest news & opinion

Choosing between a retroactive lump sum and a bigger monthly Social Security benefit

Some retirees can receive up to six months of back benefits.

Blucora to buy another broker-dealer with tax-focused advisers

Blucora is paying $180 million in stock for 1st Global, with 850 advisers.

Finra panel dismisses $100 million case involving drop in Merrill Lynch stock

Former brokers bringing charges related to stock losses during financial crisis have had 15 cases proceed, four stopped so far.

Principal-Wells Fargo retirement deal would be among largest ever

Acquisition would be in line with trend of record keepers seeking to gain scale to combat fee reduction.

Finra panel dismisses $100 million case involving drop in Merrill Lynch stock

Former brokers bringing charges related to stock losses during financial crisis have had 15 cases proceed, 4 stopped so far.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print