On Wed, 07 Jan 2015 10:10:03 -0600, Frnak McKenney
wrote:
On Sat, 03 Jan 2015 11:40:26 -0600, F George McDuffee wrote:
[...]
IMNSHO it is unreasonable to expect the average, or indeed
professional, investor to conduct in-depth due dillagance on
every investment they make, to verify/validate the rating
organization valuations http://tinyurl.com/oxhw2ah. Indeed,
in many cases the securities broker/financial advisor was
the advisor who suggested an investment in ABS [asset backed
securities -- CDOs], CDS [credit default swaps] or interest
rate swaps, based on *THEIR* understanding AT THE TIME.
Which sort of begs the question, "Who will rate the ratings agencies?"
Is there some sort of qualifying exam for becoming a Recognized Ratings
Organization?
Jes' curious...
Frank McKenney
--
http://tinyurl.com/2e7b5hs
snip
"Credit rating is a highly concentrated industry, with the
two largest CRAs—Moody's Investors Service and Standard &
Poor's (S&P)—controlling 80% of the global market share, and
the "Big Three" credit rating agencies—Moody's, S&P, and
Fitch Ratings—controlling approximately 95% of the ratings
business."
/snip
http://tinyurl.com/3h6ymd7
snip
"Originally, the SEC did not adopt specific standards for
determining which credit rating agencies were "nationally
recognized", and instead addressed the question on a
case-by-case basis.[23] NRSRO recognition was granted by the
SEC through a "No Action Letter" sent by the SEC staff.
Under this approach, if a CRA (or investment bank or
broker-dealer) were interested in using the ratings from a
particular CRA for regulatory purposes, the SEC staff would
research the market to determine whether ratings from that
particular CRA are widely used and considered "reliable and
credible." If the SEC staff determined that this was the
case, it would send a letter to the CRA indicating that if a
regulated entity were to rely on the CRA's ratings, the SEC
staff would not recommend enforcement action against that
entity. These "No Action Letters" were made public and could
be relied upon by other regulated entities, not just the
entity making the original request. The SEC later sought to
further define the criteria it uses when making this
assessment, and in March 2005 published a proposed
regulation to this effect. According to the SEC:[23]
The single most important factor in the Commission
staff’s assessment of NRSRO status is whether the rating
agency is “nationally recognized” in the United States as an
issuer of credible and reliable ratings by the predominant
users of securities ratings. The staff also reviews the
operational capability and reliability of each rating
organization. Included within this assessment a (1) the
organizational structure of the rating organization; (2) the
rating organization’s financial resources (to determine,
among other things, whether it is able to operate
independently of economic pressures or control from the
companies it rates); (3) the size and quality of the rating
organization’s staff (to determine if the entity is capable
of thoroughly and competently evaluating an issuer’s
credit); (4) the rating organization’s independence from the
companies it rates; (5) the rating organization’s rating
procedures (to determine whether it has systematic
procedures designed to produce credible and accurate
ratings); and (6) whether the rating organization has
internal procedures to prevent the misuse of nonpublic
information and whether those procedures are followed. The
staff also recommends that the agency become registered as
an investment adviser."
/snip
One of the greatest weaknesses appears to be the lack of any
publically available results, e. g. 10% of the bonds with a
AAA rating from the Humperdink Rating Agency within 5 years
of issuance, while only 1% of the bonds rated AAA by the
Smith Agency were.
FWIW: Item(5) above appears to be the weak link as the
NRSROs will not divulge their ratings methodology, so it is
impossible to evaluate their appropriateness in today's
markets. From the results and anecdotes, it appears this is
a highly subjective and idiosyncratic process, being more a
matter of taste or esthetics than facts.
There is at least one non-NRSRO maverick credit rating
agency that uses the 10k and other publically available
objective/numerical data as input to a computer program that
calculates various ratios, and using the historical data
from a large number of industries/companies, calculates the
likelyhood of default. Their results appear to be much more
accurate, and as this is a "mechanical" process, if the same
data is input the same rating results, no matter who does
it.
--
Unka' George
"Gold is the money of kings,
silver is the money of gentlemen,
barter is the money of peasants,
but debt is the money of slaves"
-Norm Franz, "Money and Wealth in the New Millenium"