A range of voices in the structured finance industry spoke against a credit rating assignment system as envisaged by Section 939F of the Dodd-Frank Act at a panel convened by the Securities and Exchange Commission.
But a few contrary opinions were on hand as well.
“We don’t believe assignment is a viable solution,” was the view of Reginald Imamura, speaking as head of the Structured Finance Industry Group, the trade association started by defectors of the American Securitization Forum in early March.
He argued that regulators determining the agencies that rate each structured finance deal would create uncertainty as well as the “moral hazard” of seeking approval from a government board. Ultimately, Imamura believes it could curb funding to the real economy.
Standing firmly on the other side of the argument were David Raboy, a chief economic consultant at Patton Boggs, and Stephen Hall from Better Markets.
The costs of doing nothing dwarf the purported costs of an assignment system, Hall said.
The way Raboy sees it, an assignment system would create incentive for the best credit rating. Regulators would use “a series of metrics that doesn’t tell the [credit rating agency] how to conduct its business,” Raboy said. “It simply judges their results after the fact [based] on two or three pieces of data.” These would include the level of defaults and how many fallen angels — deals descending from investment grade to junk — are in an agency’s structured finance portfolio.
After caveating that he was speaking his own opinion and not necessarily that of his firm, Sanjeev Handa, head of global public markets at TIAA CREF, said assessing a rating agency on performance can be a tricky thing.
Handa used the example of a legacy securitization that was issued in 2007, downgraded in 2009 at the trough of the market, and is now trading at spread levels similar to the pre-crisis. One investor might have sold on the downgrade — precisely when spreads were likely to be widest —while another who held on fared as predicted from the start. “When you’re looking at performance, investors have different horizons,” Handa said, adding that as such they’re looking for different things. “We have to determine what we’re trying to measure,” he said. “If the legal final maturity is 30 years, at which point in time do you cut off and measure performance?”