The reputations of the rating agencies mirrored the fate of the securitization market last year: As the credit conditions went south, so did their standing in the industry.
It was a strange year, to say the least, in which these agencies gave as much scrutiny as they took. There were massive downgrades throughout the summer, especially on July 12, which could be called the veritable Super Bowl of downgrades.
On this day, Standard & Poor's and Fitch Ratings cut the ratings on billions of subprime bonds and structured finance CDOs. Two days earlier, Moody's Investor Service downgraded $5.2 billion in subprime RMBS.
With the credit markets spiraling out of control, the spotlight was turned back on the rating agencies as angry investors accused them of underestimating the inherent risks of bonds backed by subprime mortgages. The criticisms culminated with an inquiry launched by the Securities Exchange Commission in September looking at how these agencies rate mortgage-related collateral.
These firms found themselves the targets of blame at many of the securitization gatherings held last year, including Information Management Network's November ABS East conference held in Orlando.
"They were the grease that made this happen," said Vincent Daniel, executive director of FrontPoint Partners, at the conference. "What astonishes me is that these rating agencies are not regulated." He further called these firms "quasi-government agencies" that need increased oversight because they are also "for-profit public entities looking for a profit increase."
The rating agencies, however, did not stand pat amid the increasing criticism. Not only did they defend themselves before Congress in September, but Moody's also took steps to enhance its RMBS rating methods. That same month Moody's issued a report detailing steps that could be taken to increase the transparency of individual loan characteristics and performance.
The agency also noted that the market should apply a two-notch downgrade for all first-lien subprime RMBS transactions originated in the second half of 2006 through the first half of 2007 and rated Aa1' through Aa3.' In addition, Moody's reorganized its businesses in August into two operating divisions - Moody's Investors Service and Moody's Analytics - to reinforce the independence of the company's ratings business.
While investors were not shy in their criticism of the rating agencies, they did receive some level of defense at a meeting hosted by the American Securitization Forum on Dec. 12 in New York. Jason D'Angelo, vice president-portfolio manager at AIG Global Investment Group, said that the entire industry must share blame regarding the current market turmoil.
"The correction is so huge it's hard for people in the industry to just admit we were wrong," D'Angelo said. "It's important to take a step back and realize how big this problem was and how many people missed it."
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