Friday, June 5, 2009

Moody's Complaining About Rating Shopping

In a sign of the upcoming TALF-subsidized apocalypse, none other than Moody's is now complaining that issuers are shopping for ratings, or seeking ratings only from those agencies they know apriori will provide the highest rating (AAA) needed for TALF inclusion. Yes, Virginia, we have gone full circle to 2005, and now the government itself is promoting the same vicious rating loop that got us into this credit mess in the first place. Zero Hedge wrote about this more than a month ago - we are happy that Moody's has finally taken the time to confirm our observations.

Luckily, consumer confidence is so high and bank stocks haven't plunged in over 2 months, so TALF will not be needed. Really? I guess Sheila Bair forgot that this really has to revert at some point, and when it does, have fun gluing the pieces back together without the mad dash Frankenstein creation that was the PPIP.

According to Bloomberg:
The need to have a AAA rating to be eligible “for government programs raises the specter of rating shopping,” Andrew Kimball, head of the global structured finance business at Moody’s Investors Service, said during the company’s investor day today. “Those programs don’t differentiate on the quality of the rating. Rating shopping becomes a problem.”

As a result, New York-based Moody’s hasn’t been included in some recent transactions, Kimball said on a conference call broadcast from the event. Under TALF, the Fed provides low-cost loans to investors to buy AAA rated securities backed by auto, credit card, equipment, education and other kinds of loans. Companies sold about $15 billion of eligible asset-backed debt ahead of the fourth deadline for the Fed’s TALF on June 2, up from about $13.5 billion in May, according to Bloomberg data.


The Obama administration and Bernanke are counting on the TALF as a cornerstone of plans to revive credit and end the recession. While the program is on pace to fall short of its $1 trillion official ceiling, Bernanke said in a letter to a lawmaker last month that the TALF has helped create “improved conditions” in the asset-backed securities market.

Cabela’s Inc., a Sidney, Nebraska-based chain that specializes in hunting and fishing gear, sold about $425 million in bonds backed by payments on its store card for TALF in April. The securities had AAA ratings from S&P, Fitch, and Toronto- based Dominion Bond Rating Service Ltd. Moody’s doesn’t grade the debt.

“The most conservative rating agency usually has the lowest market share, and in the case of TALF-eligible ABS, that would be Fitch,” said Kevin Duignan, spokesman for Fitch in New York.

‘Fact of Life’

“It is the internal mandate to maintain market share that leads an analyst to compromise credit quality,” said Jack Toliver, managing director of global commercial mortgage-backed securities at Dominion.
As I observed a few weeks back, in an effort to facilitate just this kind of rating shopping phenomenon, the Fed, for the first time, allowed DBRS and Realpoint to participate in the list of TALF rating-eligible rating agencies. Of course, this is meant only to provide a larger universe from which to pick for those 2 (or however many) raters that will provide the increasingly elusive AAA rating.

As long as the circle jerk of ratees paying the raters for the highest endorsement continues (with Bernanke's full blessings), there is not a snowball's chance in hell that we will ever get to a point where taxpayer money is funding good assets. This is precisely the crusade of Connecticut AG Richard Blumenthal. The only way to avoid the catch 22 of "paying for the AAA" is for all rating agencies to move to a subscriber paid model, incorporated currently by TALF ineligible rating provider Egan Jones. The fact that investors themselves are willing to sponsor that kind of business model means that a company like Egan Jones has the highest credibility among all raters and should be the focal point in Blumenthal's push for eliminating rating conflicts of interest within the investing community. This observation was also the reason for Greenlight's David Einhorn unabashed trashing of Moody's as a failed business model.

Zero Hedge's modest proposal to all who read us in D.C. and beyond is to implement just such a model - yes, it will means huge margin hits to the bottom lines of S&P and Moody's, Warren Buffett may end up with a loss (which should be more than made up by his gains from his Goldman Sachs investment) but it will be the first real step back toward regaining investor confidence in a rating model that has lost even the remotest trace of impartiality and objectivity. Sphere: Related Content
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