Saturday, March 24, 2007
Ratings Agencies To Blame?
Another potential culprit for the subprime mess: the ratings agencies.
Fortune's Bethany McLean writes:
So I don't blame the ratings agencies. Just like they should be able to rate corporate bonds based on their financial reports and stated sales figures, they should be able to rate CDOs and CMOs under the assumption that the underlying commodity meets a certain standard. The responsibility for making sure that mortgages meet that standard should be assigned to the originators and to the banks buying the loans.
Perhaps what the industry needs is an eBay-style rating system for originators. If an originator or lender ends up putting a more-than-average number of people into loans that fail, the secondary market may want to know about it. More public information and more transparency would be the right move.
Fortune's Bethany McLean writes:
Janet Tavakoli, who runs Tavakoli Structured Finance, points out that AA-rated tranches of CDOs backed by subprime mortgage paper now yield far more than AA-rated debt backed by other assets - a sign that the market doesn't trust the ratings. "No one believes the ratings have any value," she says. Opined Grant's Interest Rate Observer: "We are willing to bet that the agencies assigned too little weight to greed, ignorance, and soft criminality."The ratings agencies have the unenviable job of double-checking the work of an army of mortgage originators. If the incentives were appropriately set at the point of origination, ratings could be set on the macro level, based on economic factors such as the number of housing starts, interest rate trends and other wonky stuff. But now, they have to add another unpredictable variable into their economic models – the extent to which the pipeline has been stuffed with unsustainable mortgages.
So I don't blame the ratings agencies. Just like they should be able to rate corporate bonds based on their financial reports and stated sales figures, they should be able to rate CDOs and CMOs under the assumption that the underlying commodity meets a certain standard. The responsibility for making sure that mortgages meet that standard should be assigned to the originators and to the banks buying the loans.
Perhaps what the industry needs is an eBay-style rating system for originators. If an originator or lender ends up putting a more-than-average number of people into loans that fail, the secondary market may want to know about it. More public information and more transparency would be the right move.
Labels: finance, mortgage, wall street
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