Rating Agency Challenges: Wells Letter For Moody's; New SEC Rule Addresses Conflicts of Interest; Post-Employment Limitations; and Loan Level Focus & Data Needed
Rating Agencies continue to be under a microscope. Here are two recent events, and two points that should be of interest:
- Moody’s Receives a Wells Letter
- Information Sharing Under New SEC Rule 17g-5 Addresses Conflicts of Interest
- Needed: Post-Employment Limitations On Rating Agency Employees Deserve Consideration; and
- Needed: Rating Agency Focus On Loan Level Fundamentals (Using Databases)
Five year ago, would you have foreseen the following?
1. SEC Sends Moody's A Wells Letter; Cease & Desist Coming Next? ZeroHedge reports on the disclosure by Moody’s, in its 10-Q, that it received a “Wells Letter” on March 18, 2010. The 10-Q states:
“MIS [Moody's] received a ‘Wells Notice’ from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS in connection with MIS’s initial June 2007 application on SEC Form NRSRO to register as a nationally recognized statistical rating organization under the Credit Rating Agency Reform Act of 2006.”
ZeroHedge notes that this could be the “end for the rating agency.”
Separately, Market Pipeline quotes other portions of the 10-Q, which read like a bad dream for Moody’s.
Wow.
The European Union already is extremely upset with the US rating agencies. This will only add to their anger.
2. Conflict of Interest Addressed By New SEC Information Sharing Rule (new SEC Rule 17g-5): Jim Flaherty reports on the Commercial Real Estate Finance Council's "After-Work Seminar - SEC Disclosure Requirements" covering the new SEC Rule 17g-5. This rule is designed to address the conflict of interest that rating agencies have as a result of issuers paying for ratings. It goes into effect on June 2. Here is Jim’s summary:
“The rule requires issuers and hired rating agencies to maintain password-protected websites to share rating information with non-hired rating agencies.
Here are the rule’s objectives (as summarized by Jim):
- Increase the number of ratings for structured finance products,
- Promote issuance of unsolicited ratings and
- Reduce the ability of issuers to obtain better than warranted ratings by exerting influence over hired rating agencies.”
Jim gives a good summary of the seminar, including a summary of the presentation on Rule 17g-5 and a copy of the presentation – read his blog.
This is a great break through for those of us supporting, and working on, data standards in support of B2B information sharing in the commercial real estate industry. It also is another example of the transparency movement. (See my earlier posting on CMBS loan level information disclosure.)
3. Needed - Post-Employment Limitations: I suggest that this additional step be taken - just as with the restrictions placed on Federal employees, rating agency employees should face limitations on taking a job at an investment bank or any other company arranging or involved in the issuance of securities.
Is this idea under consideration?
4. Needed - Rating Agency Focus On Loan Level Fundamentals (Using Databases). Rating agency focus during CMBS 1.0 seemed to be on the financial structure and payment waterfall (among the bondholder class and the servicers) with very little focus on the equally important underlying real estate fundamentals.
Am I incorrect in my belief that the rating agencies did not focus on real estate fundamentals?
My suspicion is that since so little of the loan level information (covering real estate fundamentals, such as lease issues, title issues, etc.) was in a database format, they really did NOT have the ability to focus on bedrock real estate issues.
There is an easy technology "answer" for this challenge: require the collection of loan level information as data, and the use of MISMO standards to achieve this information sharing.
Note that I experimented at collecting title, survey, lease and other legal information in a database format. But the loan originators did not recognize the value in doing so. Surely this will change in the near future.
If you have other observations or suggestions, please post a comment below.
