FT.com / Comment - Credit ratings should be opened up to competition

FT.com / Comment - Credit ratings should be opened up to competition -- It is possible that this link may only be available to paid FT subscribers.

Frank Partnoy, a law professor at the University of San Diego, and a former Morgan Stanley banker (wonder what he's thinking about the turmoil at his alma mater), writes on today's Comment page in the Financial Times about hearings on the Credit Rating Agency Duopoly Relief Act introduced by Rep. Michael G. Fitzpatrick of Pennsylvania.

Among other things, Partnoy notes that thanks to ratings fees, Moody's Investor Services, which went public a few years ago, has a market value of "more than $13bn, not much less than General Motors and Ford."

S&P and Fitch are both owned by larger companies, S&P by McGraw-Hill, and Fitch by Fimalac. S&P accounts for more than 60% of McGraw-Hill's earnings -- although the parent company still fancies itself a book publisher. Fimalac has interests in financial services and industrial companies in Europe.

A hearing on the Fitzpatrick legislation will be held this morning in Washington. According to the press release, scheduled to testify are Partnoy himself; Nancy Stroker, Group Managing Director, Fitch Ratings; Sean Egan, Managing Director, Egan-Jones Ratings Co.; Alex J. Pollock, Resident Fellow, American Enterprise Institute; Rita M. Bolger, Managing Director and Associate General Counsel, Standard and Poor's; James A. Kaitz, President and CEO, Association for Financial Professionals.

Hearing will be webcast at 10am.

GSEs: Too big to fail? Really? Sure?

Interesting conversation on AAA ratings for Fannie and Freddie is taking place on The Housing Bubble2 blog. http://thehousingbubble2.blogspot.com/2005/06/fitch-ratings-confused-on-fannie.html

 

The problem with the GSEs is that the implicit government guarantee is based on the presumption that no one in the government would ever want to change the rules in a way that would strip them of their AAA standing. Too big to fail? Too important to the economy?

 

Look at another government sponsored enterprise, the idea of promoting private investment in leasing of railroad boxcars in the 1980s by creating a government sponsored incentive system.

 

There was a severe shortage of boxcars facing the railroad industry, so the Interstate Commerce Commission and its allies in Congress cooked up a tax-benefit financial structure that made it very attractive for wealthy people, mostly doctors, dentists, and lawyers, to buy boxcars by the, well, by the boxcar load, and then assign them to one of hundreds of shortline railroads, many of them so small that they didn't have enough trackage to store all the cars they supposedly owned.

 

The idea was that for every day the cars were away from their "home" railroad, the home road received a "per diem" rental payment from the large Class I railroads. The investors would get a share of the per diem payment, along with the tax benefits from investment tax credits, depreciation and maintenance, etc. One study at the time suggested that a dentist who bought 10 cars a year for 10 years would own, debt-free, 100 cars generating more than $1 million a year in revenue.

 

There was one problem.

 

In 1980, at the urging of the Class I railroads, Congress passed the Staggers Rail Act of 1980, deregulating much railroad traffic, including -- you guessed it -- boxcars. Then the Class I railroads started adapting the yield management software used by the airlines to put business travelers in a $900 seat next to tourists paying $69. More efficient deployment of the boxcars they owned caused the near-total collapse of the market for leased boxcars from the shortlines.

 

The lesson: Don't make long-term financial decisions because the current tax laws -- or any other laws -- make them attractive for now. Make long-term financial decisions based on the soundness of the investment on a stand-alone basis. If the deal only works because of some special convolution of the laws, plan for those convolutions to be repealed or reversed some day. Assume it will happen, because eventually, it will. After all, no one thought to test the O-rings in freezing weather, because, hey, it's Florida, and it's ALWAYS warm there.

 

Right.

Standard & Poor's Securities Evaluations Adds Michael Dooley to Its Interest Rate Swaps Pricing Team

New hire enhances Standard & Poor's complex and structured finance
mark-to-market services

To meet the growing industry demand for reliable and independent pricing of
complex financial products, Standard & Poor's today announced the addition
of Michael Dooley to Standard & Poor's Securities Evaluations Interest Rate
Swaps pricing team. Dooley is the latest addition to the growing staff of
pricing specialists supporting complex and structured asset classes at
Standard & Poor's, a leading global provider of independent research,
ratings and indices. With more than 18 years of hands-on experience,
Michael Dooley has worked at such firms as Prudential Securities, Sumitomo
Bank Securities and Massachusetts Mutual Life Insurance Company.

Read more in the next issue of RatingAgency.com, our subscription
newsletter. For subscription information, go to www.ratingagency.com.