Monday, January 11, 2010

Rating agency reform efforts have achieved little, says PF2

Original posted on Creditflux:

PF2 Securities Evaluations has kicked off a series of papers, entitled “In Search of the Missing Pedestal”, on rating agency reform. In the first instalment, Gene Phillips argues that after two years of concentrated effort there has been little progress.

No measures have been implemented to stop a rating agency from rating a product it does not understand or believe in, or a product for which it has insufficient data to support its assumptions, he says. The influences that encouraged the decline in ratings standards have not been removed. Nor, claims Phillips, has the market’s self-imposed government mandate for the dependence on rating agencies.

According to the piece, rating agencies continue to earn significant fees rating and monitoring complex securities for which their models and methodologies have proven grossly inadequate – such as CPDOs and resecuritisations including RMBS CDOs. The market has in fact increased ratings pressure and competition by adding several new rating agencies, with recent regulatory constructs continuing to be based on ratings as the sole metric against which risk capital provisions are applied.

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