PrefBlog

An interesting bit of NRSRO news today … the Treasury is jumping on the bandwagon, albeit with an afterthought that makes sense:

There must be changes in credit-rating companies’ practices, as well as in the way corporations use those ratings, he said

“The users of their services must rely less on, and appreciate more, the limitations of ratings products,” he said.

Bloomberg’s afraid to admit that the full speech has been posted by the Treasury department … I wish the media would quit these coy little games! He went on to say:

To aid in accomplishing this goal, a second private-sector group is outlining further steps that issuers, underwriters, and credit rating agencies can take to ensure the integrity and transparency of ratings, and to foster the appropriate use of ratings in risk assessment. The Asset Managers’ Group at SIFMA is leading this effort. They are exploring issues including: use and quality of ratings; business models; and credit rating agency independence. We expect their work to be completed by the end of July.

Once identified and assessed, risks must be better managed. During the past year, many financial institutions, money managers, and investors simply failed to appreciate the magnitude and nature of risks on their books. This inability to aggregate risk and transparently address public concerns led to even further uncertainty, volatility, and dislocations. We need improved risk management practices by investors and financial institutions.

Great. Better Living Through More Rules. More box-ticking to do and (inevitably) an increasingly vicious regulatory response towards asset managers unlucky enough to be invested in the cause celebre of the day.

Also on the credit ratings front, Naked Capitalism takes a dim view of the latest (rumoured) rules to decrease blind reliance on ratings in regulation of Money Market Funds.

Bloomberg has picked up on the story.

It’s all craziness. The Portfolio Manager is responsible for Everything. He may, or may not, wish to rely on Credit Rating Agency advice … although, as I have argued, it would be really nice if the Friendly Regulators did not ensure that Credit Rating Agencies have better access to information than us ordinary mortals.

The root of the trouble is this: performance doesn’t matter. Salesmen have taken over the industry and all they need is something to package and sell … whether the package is any good or not is something that really doesn’t enter into the question. If the regulators wish to avoid blow-ups and improve the quality of investment advice, then they must track performance. Anybody with a license to trade with discretion, or who is part of a team of advisors helping the PM to trade with discretion, should be reporting performance versus a benchmark. And that performance should become part of the regulatory record that is published by the regulators forever. No more burying of unsuccessful funds; no more coyness regarding long term results.

The Credit Rating Agencies, for instance, publish their track records going back 20 years. When was the last time any Assiduous Reader saw a stockbroker’s 20-year track record? Or saw a brokerage provide half the self-analysis that the NRSRO’s routinely produce?

When discussing the teleportation of US Municipal ratings to the global scale in Be Careful What You Wish For!, I suggested one flaw in the analysis was the assumption that all newly-indistinguishable credits would trade as if they were top-quality; Accrued Interest points out that there is hazard on the issuer side too:

The high ratings standards for municipals encourages some measure of fiscal conservatism. This is especially true for Aaa-rated credits, where loss of the rating would be politically embarrassing. Of course, municipalities are downgraded all the time, but clearly local politicians would rather maintain their rating than not. If the overwhelming majority of general obligation issuers are going to be rated Aaa anyway, that incentive is greatly reduced. In other words, a state like Georgia (rated Aaa) is currently incented to maintain its austerity. But if they could slide all the way down to California’s level (currently A1) and still be rated Aaa, they’ll probably do it.

But the rating hysteria is regulator/politician driven – neither group is notable for thinking things through.

The recently issued L.PR.A traded 24,250 shares today in a range of 23.00-24.40, closing at 24.00-15, 2×5. Nice range, eh? It does not reflect well on either the market maker or the underwriters. Those who sold today at 23.00 should be writing letters of complaint to the TSX regarding the day’s thoroughly appalling market-making.

Let’s see if these overpaid jokers can get it right tomorrow, when, I suspect, the excitement will be regarding BAM Flambé.

Another good day today, although not exceptional. Very good crossing volume in some of the near-term Operating Retractibles.

There were thirty-three other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Tuesday, June 24th, 2008 at 11:53 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.