Perhaps we are missing something, but just what is the practical difference between a credit rating — as bestowed by Moody’s et al — and the “quality label” being proposed by the European Central Bank?
As the Wall Street Journal reported on Thursday:
Top European banking executives and financial experts are working on a European Central Bank-supported project to revitalize the market for securities backed by pools of loans and other assets through the creation of a quality label.
If it works, the initiative could give investors greater confidence to buy securitization deals and allow banks to start moving existing loans off their balance sheets, freeing them up to lend more cash to consumers and businesses.
The label will be designed to complement credit ratings but could take on an increasingly important role because ratings firms have drawn heavy criticism for having failed to warn of the risks of asset-backed securities, or ABS, before the financial crisis struck.
The plan is in its infancy, but it is likely the label would be awarded to simply structured securitization deals of a certain size, which are backed by a certain quality of assets and for which prices are easily available.
Call us cynical, but if the WSJ’s assertions are to be believed, investors have learnt nothing at all from the structured product rating debacle. Earth to investors: labels and ratings are no substitute for due diligence.
The fact that this plan would be supported by the ECB should also raise alarms, since Monsieur Trichet has shown himself quite willing to give his blessing to assets of questionable quality. Although to be fair to the ECB, they probably wouldn’t agree to rate products that appeared to have been structured by cows.
Related links:
Top marks no longer count for much – FT
Ratings reform – FT
Exacerbating the Crisis: The Power of Rating Agencies – Spiegel Online
How Credit Raters Fended Off Oversight From Congress and SEC – The Huffington Post Investigative Fund