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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

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

  • 1. Outline
    • History and Purpose of Credit Rating Agencies
    • Gatekeeper Function and Problems
    • Rise of Securitization & Role in Crisis
    • Analysis & Reform Attempts
    • Current Legislation
    • Next Steps
  • 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. Conflict of Interest
    • Credit Rating Agency Reform Act of 2006
      • Nationally Recognized Statistical Rating Organizations NRSRO
        • Moody’s (39%)
        • S&P (40%)
        • Fitch (16%)
  • 4. Monopoly profits
  • 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. No Reliability in CDO Ratings
    • Limited Data Set
      • Rising asset prices
      • Removal of troubled loans
      • Assumption of continued correlation
    • Conflicted position
      • Ratings shopping
      • Arbitrage
      • Revenue dependence
      • Customer concentration
    • Sticky ratings (Lehman, AIG, Bear Stearns examples)
  • 7. Reform Attempts
    • Cuomo June 2008 Settlement
      • Fee for service
      • Disclosure
      • Loan Originator Review
      • Due Diligence Criteria
      • Annual independence review
      • Representations & Warranties
    • Litigation attacks First Amendment defense
    • SEC Rules require submission of performance statistics
  • 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. Proposed Legislation
    • NRSRO must file with SEC
    • SEC reviews ratings & establishes methodology rules
    • Board independence
    • Disclosure – fees, clients, methodology
    • Compliance Officer
    • Different symbols for structured finance
    • Lowers discrimination against municipalities
    • Easier to litigate

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