Plenty of criticism has already been lobbed at the rating agencies, and panelists at IMN's ABS East conference in Orlando certainly did not spare them any fault.

They were the grease that made this happen," said Vincent Daniel, executive director of FrontPoint Partners. "What astonishes me is that these rating agencies are not regulated." Daniel, speaking at "The Mortgage Research Analysts' Roundtable," called the rating agencies "quasi-government agencies" that need increased oversight because they are also "for-profit public entities looking for a profit increase."

The rating agencies were also subjected to criticism for what at least one panelist saw as a lack of transparency in their methodology.

In a panel discussion about the subprime fallout, Allan Berliant, portfolio manager for GMO, said the agencies should make clear which issuers are doing better or worse than others."They release these markdowns thousands at a time and there is no differentiation," he said. "Rating agencies need to demonstrate that they understand the mortgage market and think a little more like investors do."

While the rating agencies unsurprisingly took their fair share of hits, not everyone was buying the assumption that they are the main culprits for the meltdown. "Some of us here are veterans of this ABS conference, and over the past three years I have never once heard an investor get up here and say he didn't trust the rating agencies," said one attendee. "It seems a little odd to me that they are now blaming the rating agencies."

Panelists highlighted the need for investors to increase their due diligence. Berliant relayed a story about visiting an investment client in New York to meet with the firm's back-office staff. "Not only were we visiting with the back-office people for the first time, but you could tell their traders were also meeting them for the first time."

Karen Weaver, managing director-global head of securitization research for Deutsche Bank Securities, said that investors should take responsibility for researching assets. "It is the investor's job to decide whether a rating agency is being too aggressive in its rating," she said. Added Iris Bader, managing director of TIAA-CREF, "The rating agencies are facing some [public relations issues]. They have not made clear that they are not auditors and rely on the information they are given."

Nonetheless, Bader also said that the agencies "relied too much on models that were assumption driven," even as the market was seeing so many new entrants with unknown or checkered pasts. "It was too much too fast," she said.

Things aren't getting any easier for the rating agencies as elected officials continue to grill them on the subprime fallout. Executives from both Moody's Investors Service and Standard & Poor's were called to testify before the Senate Banking Committee in September. Meanwhile, Attorney General Richard Blumenthal of Connecticut issued subpoenas to Moody's, Standard & Poor's and Fitch Ratings Service on Oct. 26 as part of an antitrust investigation into the commercial debt rating industry.

"My investigation seeks to determine whether credit rating agencies may be exploiting their dominant positions to unfairly raise prices or exclude competitors," Blumenthal said in a statement. "Assuring debt ratings are honest and untainted is vital to investors, companies and government."

Quincy Tang, senior vice president of DBRS, and the only representative from a rating agency on a panel assessing the fallout from the subprime meltdown, admitted that the agencies "failed to understand fully how much the underwriting guidelines have been loosened." What issuers considered to be full documentation for a loan, she added, did not match up to what the agencies consider a full-doc loan.

The general consensus among analysts seems to be that the bursting of the housing bubble has been so massive it would be impossible to fault just one segment of the industry. While the rating agencies have taken their lumps, panelists said that both investors and issuers need to tighten their oversight as well.

Jeff Nabi, managing director of Assured Guaranty, argued that underwriting would have to return to the standards that were in practice in the early 90s when full documentation was required.

For investors, the key is to become more disciplined in what assets they buy. "You, as investors, will shape the future subprime market," he said.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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