Reforming the rating agencies

In my last blog on my vacation reading, I was rather contemptuous of the efforts of the New York Attorney General and of IOSCO to reform the rating agencies, but Joshua Rosner goes much further. He says that the Attorney General’s proposal will actually reward the rating agencies, and I think he is right.

Rosner also has some very sensible suggestions for genuine reforms at the end of his post. I agree with all of them and also think that they are genuinely workable:

• Requiring that any regulated institution that was required to invest only in highly rated securities should generally hold only securities listed on a major exchange. They would be allowed to hold non-exchange traded securities only if they were able to demonstrate to examiners their own independent analysis in support of rating agency assessments.
• Reducing the structured finance liability exemptions for rating agencies
• When a rating agency finds that their model needs to be updated or corrected the rating agency should be required to, on a timely basis, re-rate all existing securities that were rated using the prior model.
• [For structured products], the rating agencies should be required to automate an objective method of utilizing the originally modeled assumptions and re-rating the security monthly using the original assumptions, originally assumed loss curve and tied to the monthly servicer remittance reports.
• A qualified team that is fire-walled from revenue line pressures and reports directly to a committee of independent Board members should create ratings models.

Posted at 1:55 pm IST on Tue, 10 Jun 2008         permanent link

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