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The Fed says no-no to rating shopping

Reuters reports about the Federal Reserve opening the pool of ratings they will use for the TALF program to include two small, investor paid NRSROs (DBRS and Realpoint)… and the reporter gets to the real underlying issue…. which is the issuer doing selective disclosure… or the right of issuers to share the underwriting details with only the raters who give them the best ratings… “ratings shopping“…


….The change also did little to remove worries about “ratings shopping,” or issuers’ practice of hiring the firm that gives the highest rating.

“You can have ratings competition that doesn’t necessarily lead to the most stringent credit rating but potentially the most lenient, when you’re only looking at two out of five,” said Janet Braggs, an asset-backed analyst at Dwight Asset Management in Burlington, Vermont, who stressed she was not challenging the integrity of DBRS or Realpoint.

Realpoint CEO Dobilas also spoke out against ratings shopping in his testimony to Congress. Issuers of asset-backed securities should be required to disclose more information to all rating agencies before issues are first sold to investors, which would foster competition among the agencies to get the ratings right, he said.

Currently, issuers share pre-sale information with a few rating agencies and generally hire the firms that offer the highest ratings, he said. “The chosen agencies can earn a million dollars in fees on a single transaction,” he said. ” ~~~~

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