Movement

The buzz is starting on the shape government reform will take. Looks like the brunt of the regulation/changes will take place at the rating agency level through increased disclosure legislation. The start of this move was the SEC announcement that all rating agencies will get all deal info (SEC Ruling a Victory for Transparency).

Two more developments between the rating agencies and the Fed have created further movement:

1. Rating Agencies Want It

I watched the rating agency testimony last week on a web cam, and it was fascinating. The heads of Moodys, S&P, Fitch, RealPoint, Rapid Ratings, the SEC and a CFA were on the panel testifying about how to reform the market.

While they all said it one way or the other, Ray McDaniel, CEO of Moodys, testified that transparency of data for all parties is the single most important thing we could do to reform structured finance. Agreed!

Check out this clip:

View the archived webcast and prepared testimony:

House Financial Services Committee: Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises

2. New York Fed Wants It

On October 5, the New York Fed announced they are changing two rules on how TALF works. One change makes it easier for rating agencies to do business with the Fed, with the goals of promoting competition and increasing the number of rating agencies.

The second change was more significant. The Fed said they want the same data the rating agencies get so they can make their own, independent, analysis of the collateral. They want to decide for themselves whether the collateral is good enough and meets the credit quality standards of the TALF program.

Here is the press release on the Federal Reserve site.

Here is the language:

“Starting with the November subscription, in addition to continuing to require that collateral for TALF loans receive two triple-A ratings from TALF eligible NRSROs, the Federal Reserve Bank of New York will conduct a formal risk assessment of all proposed collateral — ABS in addition to CMBS, which are already subject to a formal risk assessment. The change to the collateral review process will enhance the Federal Reserve’s ability to ensure that TALF collateral complies with its existing high standards for credit quality, transparency, and simplicity of structure.”

So, if the Fed, as an investor, is not comfortable relying on the rating agency’s analysis for its investments, then it stands to reason they would not expect other private investors to rely solely on the rating agencies. Transparency seems to be coming. …

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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.

www.cmbs.com

www.backshop.com