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Outline <ul><li>History and Purpose of Credit Rating Agencies </li></ul><ul><li>Gatekeeper Function and Problems </li></ul...
Traditional Rating Company  Debt Issues Securities Rating Agency Assigns Rating Issuer pays rating agency Banks underwrite...
Conflict of Interest <ul><li>Credit Rating Agency Reform Act of 2006 </li></ul><ul><ul><li>Nationally Recognized Statistic...
Monopoly profits
Monopoly problems “… it could be structured by cows and we would rate it.” “ even bigger monster – the CDO market.  Let’s ...
No Reliability in CDO Ratings <ul><li>Limited Data Set </li></ul><ul><ul><li>Rising asset prices </li></ul></ul><ul><ul><l...
Reform Attempts <ul><li>Cuomo June 2008 Settlement </li></ul><ul><ul><li>Fee for service </li></ul></ul><ul><ul><li>Disclo...
Changing the Business Model Company  Debt Issues Securities Rating Agency Assigns Rating Banks underwrite debt for a fee B...
Proposed Legislation <ul><li>NRSRO must file with SEC </li></ul><ul><li>SEC reviews ratings & establishes methodology rule...
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Credit Rating Agencies Lindsley

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Presentation on credit rating agencies delivered by Lisa Lindsley to staff of House of Representatives as part of Americans for Financial Reform briefing on December 4, 2009

Published in: Economy & Finance, Business
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Transcript of "Credit Rating Agencies Lindsley"

  1. 1. Outline <ul><li>History and Purpose of Credit Rating Agencies </li></ul><ul><li>Gatekeeper Function and Problems </li></ul><ul><li>Rise of Securitization & Role in Crisis </li></ul><ul><li>Analysis & Reform Attempts </li></ul><ul><li>Current Legislation </li></ul><ul><li>Next Steps </li></ul>
  2. 2. Traditional Rating Company Debt Issues Securities Rating Agency Assigns Rating Issuer pays rating agency Banks underwrite debt for a fee Banks purchase debt from company $ $ Pension funds, mutual funds invest in debt Banks sell debt to investors $
  3. 3. Conflict of Interest <ul><li>Credit Rating Agency Reform Act of 2006 </li></ul><ul><ul><li>Nationally Recognized Statistical Rating Organizations NRSRO </li></ul></ul><ul><ul><ul><li>Moody’s (39%) </li></ul></ul></ul><ul><ul><ul><li>S&P (40%) </li></ul></ul></ul><ul><ul><ul><li>Fitch (16%) </li></ul></ul></ul>
  4. 4. Monopoly profits
  5. 5. Monopoly problems “… it could be structured by cows and we would rate it.” “ even bigger monster – the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”
  6. 6. No Reliability in CDO Ratings <ul><li>Limited Data Set </li></ul><ul><ul><li>Rising asset prices </li></ul></ul><ul><ul><li>Removal of troubled loans </li></ul></ul><ul><ul><li>Assumption of continued correlation </li></ul></ul><ul><li>Conflicted position </li></ul><ul><ul><li>Ratings shopping </li></ul></ul><ul><ul><li>Arbitrage </li></ul></ul><ul><ul><li>Revenue dependence </li></ul></ul><ul><ul><li>Customer concentration </li></ul></ul><ul><li>Sticky ratings (Lehman, AIG, Bear Stearns examples) </li></ul>
  7. 7. Reform Attempts <ul><li>Cuomo June 2008 Settlement </li></ul><ul><ul><li>Fee for service </li></ul></ul><ul><ul><li>Disclosure </li></ul></ul><ul><ul><li>Loan Originator Review </li></ul></ul><ul><ul><li>Due Diligence Criteria </li></ul></ul><ul><ul><li>Annual independence review </li></ul></ul><ul><ul><li>Representations & Warranties </li></ul></ul><ul><li>Litigation attacks First Amendment defense </li></ul><ul><li>SEC Rules require submission of performance statistics </li></ul>
  8. 8. Changing the Business Model Company Debt Issues Securities Rating Agency Assigns Rating Banks underwrite debt for a fee Banks purchase debt from company $ $ Pension funds, mutual funds invest in debt Banks sell debt to investors $ Should Investors Pay? Should SEC select agency? Should NRSRO be government-run?
  9. 9. Proposed Legislation <ul><li>NRSRO must file with SEC </li></ul><ul><li>SEC reviews ratings & establishes methodology rules </li></ul><ul><li>Board independence </li></ul><ul><li>Disclosure – fees, clients, methodology </li></ul><ul><li>Compliance Officer </li></ul><ul><li>Different symbols for structured finance </li></ul><ul><li>Lowers discrimination against municipalities </li></ul><ul><li>Easier to litigate </li></ul>

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