Credit rating agencies (CRAs) are still scrutinized and blamed for their failure to capture the true risk in rated ABS transactions.

Just last week, past and present employees of Moody's Investors Service were required to testify to the House of Representatives' Committee on Oversight and Government Reform as it probes credit rating agencies.

Standard & Poor's and Fitch Ratings have responded by fine-tuning their ratings, as Nora Colomer details in this month's cover story.

S&P recently altered its methodologies and assumptions for evaluating U.S. RMBS deals backed by prime, Alt-A and subprime mortgages, and followed up by updating its criteria for corporate CDOs.

Even though Fitch already had a system in place for recovery ratings, the current down cycle of the economy gave the firm more information to feed into its methodology.

But will the securitization market believe that their tweaked or enhanced definition of a triple-A security is foolproof?

The bigger question for some is whether the CRAs have overreacted to criticism that they were lax by swinging too far in the opposite direction.

Similarly, as many ABS people see it, FASB's proposed accounting rules are stiflingly cautious.

Spurred by proposed regulatory capital rules, the accounting changes will make it difficult for certain ABS transactions to stay off banks' balance sheets, requiring financial institutions to hold more capital against these assets.

The outcome for securitization is fairly bleak, as I explore in my story.

Regrettably, other facets of the market are also falling victim to the law of unintended consequences.

The Internal Revenue Service's well-intentioned update on REMIC rules, for instance, has an 80% property valuation test required to modify commercial loans. That could undermine one of the reasons why the rules were changed in the first place: to help loans that are severely underwater.

In his column, Bill Berliner also examines well-meaning regulation that is ineffective at best and harmful at worst. In his sightline is the Obama administration's sweeping revision of U.S. financial regulation, which includes the elevation of the Federal Reserve to the role of primary financial regulator and the creation of a Financial Services Oversight Council to monitor systemic risks resulting from the collapse of a single entity.

Bill argues that a major fault with the proposal is that it aims to identify firms that pose systemic risks, in a sense looking backward instead of creating a structure robust and flexible enough to anticipate future problems in the financial system.

In our global section, Felipe Ossa tackles two subjects on different sides of the world. Neither is strictly ABS, but both are areas very much on the radar of securitization players. In his story on Shariah-compliant bonds, Felipe talks to key observers about the prospects for asset-backed deals within a world that is still overwhelmingly asset-based. He hops over to Mexico for a piece on a hot new instrument that is an equity vehicle that, curiously, has structured finance written all over it.

Even an improving market is a mixed bag. John Hintze describes how the massive leap in the values of toxic MBS since March might stem the urgency of the Treasury's Public-Private Investment Program and dampen investors' returns.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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