Like he did for the relationship between mortgage brokers and appraisers, the three major bond-rating firms reached an agreement with Cuomo, the New York Attorney General that creates more independence for ratings agencies. Cuomo has been one of the only public official currently in office that hasn’t simply tried to slap more regulations on all parties, pointing the finger and saying don’t do bad things.
Give me a break.
Like him or not, Cuomo has done is to fix systemic flaws within the financial system by following the mortgage.
Rating agencies were one of the weakest links in the integrity of the lending system.
Today’s WSJ article Bond-Rating Fee Overhaul Looms in Settlement, discusses the potential agreement.
many critics claim has been a chronic problem with bond ratings: They are paid for by the entities being rated. That financial dependence has been blamed for the industry’s failure to predict that risky subprime mortgages would crumble, resulting in losses and shaken confidence.
If the firm gave too low a rating, it wouldn’t get hired by the investment bank who would simply go to the next agency to get the rating they needed:
Under the Cuomo settlement, which would cover the hardest-hit portions of the mortgage market, the firms would get paid for their review, even if they didn’t end up getting hired to rate the deal. This would mean the firms would get paid even if they were tough. The plan, which requires final agreement by Mr. Cuomo’s office and the rating firms, wouldn’t dictate the exact fees rating firms could charge. But the firms would be required to charge more than a nominal fee for their preliminary work.
It still doesn’t fully separate the rating agencies for preferential treatment from bond issuers but it sure is a good start.
Cuomo seems to be less abrasive that Spitzer, his predecessor was. At the very least, the bond agencies were guilty of gross negligence for using the wrong data to understand the potential default rates for the securitization of subprime, alt-a and for that matter prime loans. Last summer they suddenly downgraded highly rated mortgage bonds claiming the models they had didn’t work.
Cuomo seems to be more interested in fixing investor confidence than playing hard ball with the agencies. It’s refreshing to think there is a light at the end of the securitization tunnel.