Archive for the “Rating Agencies” Category

Standard & Poor, Fitch Ratings, and Moody’s Investors Service all have agreed to upgrade the system for rating mortgage-backed securities and change their fee-collection methods. According to the agreement reached with New York Attorney General Andrew Cuomo, the new system will be implemented within six months, none too soon for investors burned by the mortgage crisis.

The reforms minimize Wall Street’s ability to put bond-rating firms in competition with each other while shopping for the highest or easiest rating, Cuomo says. The $5 billion bond-rating industry has been criticized for its part in setting overly optimistic ratings for subprime mortgage bonds over the last two years.

Although the new agreement doesn’t fine ratings agencies for any past wrongdoings, it does address ongoing bond ratings issues. Currently, ratings agencies receive compensation from the entities they rate. Even though multiple ratings firms evaluate the majority of deals, not every one rates the deal and receives payment.

In Cuomo’s agreement, even if agencies don’t end up rating the deal, they receive compensation for their reviews, making it less critical for rating firms to win assignments from bond issuers. In addition, the ratings firms now must reveal how much they’re paid in these securities. This could spur further disclosure in ratings for corporate and government bonds and structured-finance ratings.

To help ratings firms better comprehend the mortgage securities they rate, the firms must also examine due-diligence reports on loans comprising the securities and set criteria for evaluating loan originators.

The SEC, which will issue its own adjusted rules soon, praised Cuomo’s efforts. These steps bode well for investors looking to avoid further losses.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.Â

Standard & Poor, Fitch Ratings, and Moody’s Investors Service all have agreed to upgrade the system for rating mortgage-backed securities and change their fee-collection methods. According to the agreement reached with New York Attorney General Andrew Cuomo, the new system will be implemented within six months, none too soon for investors burned by the mortgage crisis.

The reforms minimize Wall Street’s ability to put bond-rating firms in competition with each other while shopping for the highest or easiest rating, Cuomo says. The $5 billion bond-rating industry has been criticized for its part in setting overly optimistic ratings for subprime mortgage bonds over the last two years.

Although the new agreement doesn’t fine ratings agencies for any past wrongdoings, it does address ongoing bond ratings issues. Currently, ratings agencies receive compensation from the entities they rate. Even though multiple ratings firms evaluate the majority of deals, not every one rates the deal and receives payment.

In Cuomo’s agreement, even if agencies don’t end up rating the deal, they receive compensation for their reviews, making it less critical for rating firms to win assignments from bond issuers. In addition, the ratings firms now must reveal how much they’re paid in these securities. This could spur further disclosure in ratings for corporate and government bonds and structured-finance ratings.

To help ratings firms better comprehend the mortgage securities they rate, the firms must also examine due-diligence reports on loans comprising the securities and set criteria for evaluating loan originators.

The SEC, which will issue its own adjusted rules soon, praised Cuomo’s efforts. These steps bode well for investors looking to avoid further losses.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.Â

The Securities and Exchange Commission (SEC) is on the hot seat, with Congress urging the regulatory agency to improve its oversight of credit-rating firms. The firms - including Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s Ratings Services - are being criticized for missing the mark when it came to assessing the risks of mortgage-backed securities.

Both business analysts and political leaders claim that mistake played a major role in the subprime mortgage crisis, which has since roiled the financial markets. Many believe the credit-rating agencies were blinded by their relationships with various debt issuers, because the issuers typically pay rating agencies to grade their debt.

Prior to the subprime fallout, Fitch, Moody’s and Standard & Poor’s each had given highly favorable ratings on the quality of many mortgage-backed securities. Then, after the subprime crisis hit full force and the credit crunch ensued, the rating agencies did an about-face, downgrading thousands of mortgage-related investments.

Accusations of conflicts of interest between rating agencies and issuers have been the subject of numerous news articles. A story in the Wall Street Journal reported that Moody’s periodically switched ratings analysts from certain deals at the request of the Wall Street firms, as well as altered its approach on other deals after Wall Street firms complained.

This isn’t the first time credit-rating agencies have found themselves in hot water. Two years ago, they were taken to task for failing to reduce their investment-grade ratings of Enron to junk status until four days before the company’s collapse. Shortly thereafter, the Credit Rating Agency Reform Act was signed into law, which gave the SEC additional authority to oversee rating agencies.

Now the SEC is being called upon to exert that power. Reportedly, it is considering a wide range of rules to strengthen accountability and transparency of the rating agencies, as well as a new scale for measuring mortgage-related and other structured-finance bonds.

Meanwhile, the credit-rating agencies can expect continued backlash in the weeks and months ahead over their critical misstep in putting investment-grade ratings on so many mortgage-backed securities. Not only have they lost credibility in the investing community but they also may very well find themselves in court for rubberstamping those doomed subprime deals.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The problems facing structured investment vehicles (SIVs) continue to rage on. The structures have been hit hard in the turmoil sweeping the credit markets from their lack of access to funding and a massive decline in the value of the assets they hold.

Now, Moody’s Investors Service has announced that HSBC Holdings Plc and American International Group Inc. (AIG) are among those facing possible downgrades on $3 billion of SIVs. The cuts would affect capital notes, the lowest ranking debt, issued by HSBC’s Asscher Finance, WestLB’s Harrier and Kestrel, Bank of Montreal’s Links Finance, Banque AIG’s Nightingale Finance and Societe Generale’s Premier Asset Collateralized Entity.

Reportedly, holders of this type of debt are not likely to benefit from any type of restructuring proposal.

SIVs are special-purpose entities that issue commercial paper and medium-term notes to buy longer-term, higher-yield securities. An example would be a collateralized debt obligation (CDO). A SIV uses the proceeds from the sale of commercial paper to pay the principal and interest owed on previously issued, commercial paper that has matured. The mortgage securities include risky sub-prime mortgages.

When subprime loans go into default, the value of the CDO holding interest in the loans and the credit-worthiness of the SIV that holds the CDOs plummets. As a result, money funds have pulled back their investment in SIV commercial paper, leaving SIVs unable to finance new investments or meet current debt obligations.

All six of the capital notes under review by Moody’s already have been rated in the “junk” category, between Ba2 and Caa3.

In announcing the potential cuts, Moody’s said its actions reflected “further deterioration in the market values of SIV portfolios, and the limited benefits to capital notes of the various restructuring proposals implemented by bank sponsors.

Meanwhile, as reported in an April 24 article on Bloomberg.com, SIVs with at least $31 billion of debt have defaulted in the past nine months after investors stopped buying their notes because of the subprime toxicity surrounding them.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.Â

MBIA, the largest financial guarantor in the world, saw its insurance rating cut by Fitch Ratings from AAA to AA on April 4. Â The move, according to Fitch, was done because the bond insurer fell as much as $3.8 billion short of what was needed to keep the highest rating of AAA.

Fitch also cut the long-term rating of the MBIA’s parent holding company to A from AA.

MBIA joins several other bond issuers whose ratings have been slashed recently because of their exposure to collateralized debt obligations and potential future losses on those investments. According to Fitch, losses on MBIA’s portfolio tied to subprime mortgages ultimately could be as much as $4.9 billion. The other major ratings agencies - Moody’s Investor Service and Standard & Poor’s - have maintained their AAA-rating for MBIA, apparently satisfied with the fact it already had raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus, LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for the past six months.

In recent months, the bond insurance market has become increasingly vulnerable, joining other financial markets infected from the fallout of the subprime virus. As delinquencies and defaults on subprime mortgages continue to unfold, the bond insurance firms that insured these risky debt products will be forced to pay out much more money in claims than they have in the past.

All of which creates a domino effect. If the credit rating agencies believe a bond insurance firm is unable to come up with enough capital to cover potential defaults, they will downgrade it. This means the bonds they insure will be worth less, and the investors who purchased the bonds in the first place face additional losses.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Moody’s Investors Service has slashed the financial strength rating of New-York-based Financial Guaranty Insurance Co. (FGIC) from A3 to Baa3 - just one step above junk-bond status. The downgrade reflects the bond insurer’s inability to implement plans that would raise new capital and take on new business.

Moody’s also lowered its senior debt rating on FGIC Corp holding company to B3 from Ba1.

FGIC joins several other bond insurers trying to stay afloat these days and maintain ratings in the face of losses from subprime mortgage and related debt that has eaten away at their capital. Last week, FGIC saw its financial strength rating reduced six levels to junk by Standard & Poor’s.

In a March press statement, the insurer said it plans to file a plan of action to the New York state insurance department because the amount of total risk has exceeded a regulatory limit. The company’s capital surplus is about $195 million above statutory requirements, according to Bloomberg.com.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.Â

At first glance, the Federal Reserve’s announcement to lend $200 billion in treasury securities to Wall Street banks and accept AAA-rated private label mortgage-backed securities as collateral sounds like a good way to provide liquidity to failing markets. But, if you looked a little deeper, it’s likely a band-aid solution that could end up costing taxpayers billions of dollars.

The reason is simple. The majority of the AAA-rated private label mortgage-backed securities are not AAA at all. In fact, it’s just the opposite – many of them do not meet the criteria of the ratings agencies for AAA securities and should be downgraded significantly. This means these kinds of securities not only are highly overvalued but also present far more risk to taxpayers than the Federal Reserve is letting on.Â

A March 11, 2008, article on Bloomberg.com by Mark Pittman sheds further light on this issue. According to Pittman, none of the 80 AAA securities in the ABX indexes that track subprime securities meet Standard & Poor’s requirements for AAA securities. Pittman went on to cite several examples of AAA-rated bond issues that fell far short of satisfying AAA requirements.  He concluded by stating that the proper evaluation of subprime securities would “strip at least $120 billion in bonds of their AAA status.” And that’s exactly what a number of analysts predict, as many AAA mortgage-backed securities are expected to be significantly downgraded in the not-too-distant future.

This makes it all the more questionable as to why the Federal Reserve would finance Wall Street banks by providing them with highly liquid, highly valuable treasury securities while accepting poor quality, illiquid, low value securities as collateral. In the end, it’s the American taxpayers who will suffer the consequences – again.Â

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses.