There might be a common sense argument to be made for MBIA’s somewhat doughty request for Fitch to withdraw its rating on Friday.
To wit, MBIA is already rated by the two largest rating agencies. Somehow, however, that argument isn’t all that compelling.
Responding to a post by the NYT’s Floyd Norris, MBIA CEO Jay Brown himself (HT Felix Salmon) expands beyond the anodyne press release furnished by MBIA proper on Friday. Brown comments:
+ Fitch’s coverage of the underlying credit quality of MBIA’s insured portfolio is limited.
+ Fitch’s capital allocation estimate for Public Finance is approximately half that of the other rating agency capital models - and we believe this level of capitalization at the Triple-A level is inappropriate and would pose a serious financial threat to policyholders if a company could obtain such a low grade triple-a rating.
+ Third, Fitch’s capital model for financial guarantee insurance companies presents severe operational challenges for capital planning and pricing of our product. We need to plan for decades and their model makes it difficult to plan even a year at a time
How compelling, though, are these arguments? They certainly put the spotlight on Fitch. But actually, they’re more parry than thrust. Jay Brown’s actual letter to Fitch - which the rating agency has published - gives a more telling account. In particular:
…the IFS ratings have taken on a life of their own, totally disconnected from the underlying credit instruments that they enhance. In the 24/7 information-driven markets of today, the mere rumor of a potential change in ratings methodology or a rating committee meeting can drive the equity market, the CDS markets, and cause wild speculative pricing in the extremely low frequency-of-loss U.S. public finance market. As such, the actual value of the IFS rating to investors who either hold or are interested in purchasing credit-enhanced instruments or are interested in purchasing has been overwhelmed by the forces of trading markets in unrelated securities on the financial guarantor itself.
In other words, MBIA feel Fitch’s ratings are based too much on marking to market, and not enough on marking to model.
We could play around endlessly with the semantics of this, but as with so many things, isn’t timing everything? It is, as Jay Brown says, only in the ‘current’ “credit cyclone” that this has become an issue.
So a simple enough question: would MBIA be ditching Fitch did they still rate it AAA?
