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    EdG
    WSJ: Ohio Files Suit Against Credit Raters
    Topic posted November 21, 2009 by EdGElite Contributor, last edited January 19, 2012
    343 Views, 1 Comment
    Title:
    WSJ: Ohio Files Suit Against Credit Raters
    Content:

    WSJ: Ohio AG files lawsuit agains the despotic regime of rating agencies: Fitch, Moodys and S&P.  The 77-page complaint alleges the agencies gave inflated ratings to MBS (residential mortgage securities) and cites other testimony from congressional hearings and former rating agency employees that gave testimony of negligent business practices.

    The suit if focused on Ohio's public retirement fund that was AAA rated and yet lost $457 million.  I previously blogged on how the rating agencies attempted to invoke the 5th Amendment at the congressional hearings!  Why?  What do they have to hide?

    Trend & Environmental Risk Significance - potentially huge.  Insurance companies have already dropped the 3 rating agencies for their bond investments ratings.  Insurance companies are 'institutional investors' and are under stringent security regulations to invest in highly-rated securities.  Such securities are backed by commercial properties - that need Phase Is.  Rating agencies are losing significant clout in the financial world - and it will likely carry over to other institutional investors - see my forum topic on REITS.

    Dianne Crocker and I recently discussed a new CMBS issuance 'rated' by the agencies.  Would you trust their AAA rating?  I personally have invested in MBS as you can now buy such bonds at 60 to 70 cent on the dollar and get a 6% coupon - for a total return of 9-10%.  These are (were) AAA rated.  Guess what?  Even after these new securities stripped out the 'toxic' mortgages and were re-rated AAA - they still ended up a few months later being downgraded to BBB- and I am sitting on a paper loss! 

    In my previous life - rating agencies (a few individuals in particular) literally dictated how environmental insurance was to be structured and hence the environmental reports supporting said policies.  They had no idea how the insurance worked - but their word was infallible.  Meet their despotic requirements or get "dinged" as an issuer of the securities.

    Where are these people today?  Capitalism is what makes this country great and the commercial real estate industry supports a huge percentage of environmental consultant's work.  I think it's our responsibility to question people that have that much 'say-so' and demand accountability and transparency.

    Comment

    • EdG
      posted April 25, 2010 by EdGElite Contributor

      WSJ (4/24/10) "Raters Grilled Over Relationship with Bankers".   It's taking over a 1.5 years and Congress is still 'investigating' rating agencies role in the whole credit crisis debacle. 

      Short recap to the pertinence to EP / environmental attorney, etc:  The commercial mortgage backed security (CMBS or "Wall Street") industry hit a record in 2007 originating and issuing over $230 Billion in commercial real estate.  Compared to $3 Billion in 2009.  I think a catastrophic drop off and impact is not an overstatement.

      Tied directly to CMBS issuance is rating agencies significant role and direct impact and influence over the securitization process.  One would not have to read this or any other article to understand that the dynamic between Wall Street issuers and rating agencies (there are only 3; S&P, Moody's and Fitch) is fundamentally flawed. 

      In simple terms a bank originates and pile a bunch of real estate loans into a bundle and then they want to sell them at a low interest rate - so they can make money on: the sale, the arbitrage in interest rate and even make money on managing the pool as a Trustee, Master or Special Servicer. 

      So what the bank (issuer) really needs to be successful is the highest rating possible at the lowest 'cost' to the bank (low subordination levels and low interest rates - e.g. de minimis credit enhancements - it gets complicated).

      So if the bank goes to S&P and they don't give the bank the rating they want they pressure the analyst and/or take the rating to another agency.  Hence the next go around S&P will give the bank a better rating. 

      See rating agencies' role in the subprime meltdown (entire credit crisis) which rated such securities AAA; as well as the SEC's recent lawsuit against Goldman Sachs' Abacus financial product.