Ratings rotation was advocated by some panelists at a talk a convened by the Securities and Exchange Commission on a credit rating assignment system as envisaged by Section 939F of the Dodd-Frank Act, also known as the Franken Amendment.
Jules Kroll, CEO of Kroll Bond Ratings, briskly championed rotation.
“We have a simple system now that’s working,” he said, referring to Freddie Mac’s rotational approach to its Multifamily K Certificates. Kroll added that a similar system could be applied to the wider structured finance industry and could be set up without a bloated bureaucracy.
Apart from reducing conflicts of interest, such a system would break up the oligopoly of the big rating agencies, the bane of smaller players such as Kroll.
“We need to take the power out of the hands of S&P, Moody’s and Fitch,” Kroll added.
Martin Hughes, CEO of Redwood Trust, also saw value in a rotation system. Such an approach could make the ratings industry less “clubby” he said, referring to Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.
As the head of the Structured Finance Industry Group, an organization that aims to represent the entire industry, Reginald Imamura seemed to sit on the fence when it came to rotation. But he warned that any government-run system that felt the need to replicate the complexity of the risk assessment currently carried out by the range of players in structured finance would end up being an unwieldy and costly bureaucracy.
S&P President Douglas Peterson was unsurprisingly against the idea of rotation. As with other members of the industry, including many outside the ratings sphere, he believed that an enhancement of 17g-5 would help ease conflicts of interest. That rule requires arrangers to make the details of a deal provided to the hired rating agencies also available to those that were not hired.