When Eric Kolchinsky, a recently-suspended managing director at Moody’s, deplored the rating agency’s credit policy group as weak and short staffed, and said senior managers there tend to favour revenue over quality, few were surprised.
(Moody’s, as you would expect, contends the company “has strong policies in place to manage conflicts and protect the independence and integrity of the ratings process,” and that its credit policy and compliance groups are “fully staffed to meet current and anticipated needs”, according a statement sent to the Wall Street Journal. Nonetheless, the rating agency told Reuters it “takes seriously all allegations of potential impropriety”.)
Mr Kolchinsky is due to appear in Washington on Thursday, to testify before the House Committee on Oversight and Government Reform. He will be joined in the dock by Joe Dear, Calpers‘ chief investment officer, and Floyd Abrams, a first-amendment lawyer appearing on behalf of S&P. The Committee is expected to discuss whether rating agencies have cleaned up their act in the aftermath of a firestorm of criticism about inflated and error-prone ratings on structured securities.
Moody’s and S&P — the dominant agencies — have attracted the most attention, but they are not the only players in the rating game. Realpoint, a smaller firm with a commercial real estate focus, on Wednesday was deemed an “Acceptable Rating Organization” by the National Association of Rating Commissioners. This mandate means US insurance companies will be able to use Realpoint’s CMBS ratings to calculate their capital strength and required reserves.
Egan Jones, another niche player, has been hailed for its consistently critical stance on the major bond insurers. In 2007, when MBIA et al were still considered bullet-proof (at least as far the other rating agencies were concerned), founder Sean Egan projected massive losses for the monoline monoliths – rightly, as it turned out.
But not all the contenders to the Moody’s throne have had good reviews. On Wednesday, Bloomberg reported Massachusetts was reviewing the rating given by Toronto-based DBRS to investments tied to life insurance policies “because they might be inflated like the discredited mortgage bonds at the center of the recession.”
According to the statement by William Galvin, the secretary of the Commonwealth of Massachusetts:
Bundling the policies to create another investment opportunity closely parallels the subprime mortgage market and subsequent meltdown, whose effects investors are still reeling from
The analysis and rating of life-settlement securities — popularly known as “death bonds” — is something of a DBRS speciality, and Galvin’s clout is considerable in the realm of securities regulation. Since July, he has led an investigation into complex ETFs and another into mutual fund pricing; he was also at the forefront of the accusations against Fairfield Greenwhich, the Madoff feeder fund.
According to Bloomberg, a spokeswoman for DBRS would only say the ratings firm is currently reviewing the Massachusetts letter and may comment later.
DBRS president Daniel Curry was also expected to appear in Washington on Thursday, alongside executives from the life-settlement industry, at a hearing of the House Financial Services Capital Markets subcommittee. Officials from the SEC and the Iowa Department of Insurance are also expected to testify.
Related links:
Wall Street Pursues Profit in Bundles of Life Insurance – NY Times
Are Life Settlements Securities? – Hedge Fund Law Blog