Financial columnists call for government takeover of rating industry

Columnists Scott Burns and Laurence J. Kotlikoff appear to be calling for the government to shut down the rating agencies and take over the responsibility for assessing risk in debt securities.

Burns and Kotlikoff have launched a broadside on their new website, AssetBuilder.com, Ending Insider Rating and the Credit Crisis, in which they observe that

Like Enron's accountants, the rating agencies knew where their bread was buttered. Now we have trillions of dollars of securities that no one is willing to touch. Everyone is afraid that securities that were rated triple A may really be triple Z. So we also have a credibility crisis.

They go further than anyone else so far, and call for the Fed to create a "Federal Financial Authority."

Similar to the FDA (the Food and Drug Administration), the FFA would rate financial securities. It would place warning labels on subprime mortgages and securities derived from them. The FFA would also rate the safety of investment banks, insurance companies, hedge funds and commercial banks.

Don't know if the government will have the expertise to assess this kind of risk. What do you think of this approach?

Drumbeats for greater rater regulation are rising.

More articles are popping up suggesting that a good solution to the subprime mess is to regulate rating agencies more.

In Dallas Financial Columnist: Time to Rate the Rating Agencies?
Fri, 28 Mar 2008 21:22:00 GMT  , we read

Scott Burns, a popular personal finance and business writer out of Dallas, is recommending in an upcoming column that the U.S. government establish a regulator to oversee the rating practices of companies like Moody's and Standard & Poor's ...

In the Financial Times' Alphaville blog, "The rating on the wall," (Mar 28, 2008)

Is the tide beginning to turn against the rating agencies?  IOSCO- the International Organisation of Securities Commissions - has just published its long anticipated consultation paper on the role of the rating agencies. (The paper also includes the actual new clauses to be inserted into the IOSCO code of conduct)....

CFO Magazine wonders if the agencies' credibility has been irreparably damaged, in "Are Rating Agencies Forever Broken?" saying:

The group that helped lawmakers write the Credit Rating Agency Reform Act says the law isn't being enforced — and worries that even better enforcement might not be enough to rebuild market confidence in ratings.

More US Congressional and Senate Hearings are getting scheduled.

In February, former S&P municipal analyst Dick Larkin, left, now with Herbert J. Sims & Co., testified at the February 14 “The State of the Bond Insurance Industry” hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.

(That's the same House subcommittee hearing that brought former NY Gov. Elliot Spitzer to Washington for his ill-fated assignation.)

We'll link to Dick's testimony when it's made available to us.

Citi to pay creditors of Enron $1.66B

Citigroup agreed Wednesday to pay $1.66 billion to creditors of Enron who lost money when the energy trader collapsed in 2001. Citi, which denied any wrongdoing, was the last remaining defendant in a bankruptcy suit filed in 2003...

Citi to pay creditors of Enron $1.66B
Thu, 27 Mar 2008 09:41:00 GMT

Title Insurance: Another shoe in the insurance industry that might drop someday...

Happened to catch this news release in a different watch bin...now here's a niche that few are looking at...title insurance. This could be a huge target for future scrutiny as the sub-prime afflicted properties are foreclosed, repossessed, and then resold to a new generation of mortgage holders...

As mortgage-backed securities get unwound and unbundled, who will be sure that the titles are all clear, and what if they are not?

COLUMBUS, OH (MARKET WIRE) The depth of the real estate market's downturn has exceeded most predictions and expectations. Given the Title insurance industry's dependence on real estate transactions to drive top line growth, this becomes painfully evident during the down years and transitional period of the larger cycles. During these periods, it is important to discern between the ability of Title underwriters to respond to meritorious claims versus cyclical market challenges impacting publicly traded Title underwriters.

Demotech, Inc.: Title Underwriters Ability to Honor Claims Remains Exceptional
cs@marketwire.com
Thu, 27 Mar 2008 11:33:00 GMT

That's right, you wet your finger, you stick it up in the air, and the side that dries first is where the ratings winds are blowing from...

A new post from BankNet360.com suggests that Fitch may have a hard time maintaining ratings on MBIA, now that the bond insurer has decided not to share nonpublic information with the #3 rating agency.

Says BN360: "So Fitch is going to determine the credit-worthiness of MBIA without access to the proper information. That’s helpful."

Fitch CEO Stephen Joynt (left) is quoted defending the decision to fly on instruments: "...we have concluded that maintaining the MBIA ratings at this time is most appropriate for investors and causes the least disruption to the marketplace."

Apparently it's better to maintain a rating than (heaven forfend!) to accurately assess it, or withdraw it if not enough information is available.

Thumbs Down for the Rating Agency Oligopoly
banknet360_webmaster@BankNet360.com (Edward Song)
Wed, 26 Mar 2008 14:32:00 GMT

Someone else remembers the "old days" when AAA meant AAA

Roger Ehrenberg's InformationArbitrage blog makes the point that there was once a time in the financial markets that had more clarity -- and reliability.

AAA really meant AAA, not AAA because the legal structures "should" prevent the owners from filing the SPC into bankruptcy.

We all know how that's working for us, right?

Another problem is that an element of liquidity was predicated upon the faith and belief in the ratings system. A AAA-rated security was available for purchase by trillions of investment dollars, AA-rated fewer trillions, A-rated hundreds of billions, and so on. But now that we've seen tens of billions of AAA-rated securities marked like junk, the very foundations of the institutional investment model have been shaken. Trust has been shattered. No trust, no liquidity.

(Dis)continuous Time Finance
Wed, 26 Mar 2008 22:08:41 GMT

More bad news for bond insurer FGIC...

PR and IR people at FGIC will be busy the rest of the week...("no, no no, everything is fine.")

Start to worry if Jim Kramer says to keep your money there.

Fitch Downgrades FGIC to 'BBB'; Outlook Negative
webmaster@fitchratings.com
Wed, 26 Mar 2008 22:39:53 GMT

S&P Podcast: Global Drugmakers Heed Rising Calls For Obesity Meds

S&P continues producing podcasts...this is the drug all of us baby boomers are hoping for so we don't really have to give up pizza and Tastykakes.

The demand for prescription drugs to treat obesity and related health problems is growing, and pharmaceutical companies hope to benefit. Tune in as Standard & Poor's Director Olaf Toelke discusses the current roadblocks and possible future benefits for credit quality.

Global Drugmakers Heed Rising Calls For Obesity Meds
Mon, 24 Mar 2008 00:00:32 GMT