At the American Securitization Forum (ASF) Sunset Seminar on rating agency reform last Tuesday held at its headquarters, panelists urged ABS market professionals to bring their opinions on the issue before the Securities and Exchange Commission. It's a race against time before the SEC and Congress begin to enact rules on credit rating agency reform, at the Federal government's behest, that could significantly impact the ABS industry in general.
For years now, the same cast of characters have appeared before the SEC and Congress and articulated the same set of arguments in discussions about credit rating agency reform, said Charlie Brown, general counsel at Fitch Ratings.
"All of you are affected by all of these things," Brown told the audience. "Do you think Fitch is full of crap when it comes to notching? That is for you to say. It is hard to lobby Congress, but it is not hard to write a letter to the SEC."
And while panelists stressed that maintaining rating agency independence and enhancing competition in the industry were crucial in any reform effort, talk occasionally, and sharply, turned to the practice of notching.
Notching involves a rating agency assigning a lower rating on the underlying assets of a security if those assets previously carried a competing agency's rating. The practice sparked a storm of controversy in 2001, involving ratings on portfolios referenced to CDOs. Some market players opined that CDO deals with multiple agency ratings priced tighter and created demand for paper rated by other agencies. Fitch Ratings has consistently called the practice unfair and anticompetitive.
Congress and the SEC must now grapple with how to provide oversight and increase competition while preserving the integrity of the rating process, according to Brown.
"We do have within the marketplace two monopolies - Standard & Poor's and Moody's Investor's Service - that have a monopoly of power," said Brown. "As long as that duopoly exists, it will be tough to infuse the market with meaningful competition, no matter now many companies achieve the coveted national recognition from the SEC."
Fitch Ratings, said Brown, has advocated using straightforward and objective criteria for judging rating agencies. Fitch believes the best way to do this is to judge performance over time against a common benchmark for ratings. Agencies, under that plan, would publish their performance statistics against the benchmark for the ratings industry.
When it came to notching, others disagreed pointedly with Fitch. Notching by competing rating agencies is essentially no different than investors, issuers or government entities telling any single rating agency how they think debt should be assessed, said John Goggins, senior vice president and general counsel at Moody's.
"We hear that every day, and we think that what is in the best interest [of the industry] is if each rating agency keeps its own opinion," Goggins said.
Meanwhile, the ASF also outlined its policy recommendations at the gathering last week. It believes that any subsequent policy should preserve rating agency independence, enhance market competition among the agencies, promote greater transparency of their business methods and fees, and improve the criteria for obtaining designation as a nationally recognized credit rating agency.
(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.