The Obama administration is pushing tough reforms for credit rating agencies and wants them to differentiate between corporate bonds and mortgage-backed securities -- a measure long opposed by Wall Street and the real estate finance industry.
Under the White House plan for regulatory reform, to be introduced on Wednesday, agencies such as Moody's Corp, Standard & Poor's and Fimalac SA's Fitch Ratings could be required to create a separate rating scale for products linked to mortgages and other loans.
A rating is a rating, regardless of asset class it should mean the same thing, said Brendan Reilly, senior vice president with the Commercial Mortgage Securities Association, which represents the commercial real estate finance industry.
If you put a symbol on (structured products) you would in some way suggest that that rating is different, because why else would you have to put some kind of modifier on it, Reilly said on Monday.
But opponents say that change will hurt ordinary investors and credit markets.
Wall Street and the real estate industry say a symbol or some kind of modifier to a triple A rating would prevent pension funds and mutual funds from considering structured products because they are only allowed to buy investment grade securities. This would in turn crimp the credit markets, which have begun to show signs of improvement.
The administration's plan will require rating agencies to publicly disclose more information about the methodology they use to rate structured finance products such as asset backed securities, a Treasury Department spokesman said on Monday.
The White House also wants to reduce the reliance of investors and regulators on credit rating agencies, according to a newspaper editorial by U.S. Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers.
Most of the administration's plans are being addressed by the U.S. Securities and Exchange Commission, which gained oversight of the rating agencies through a 2006 law designed to promote competition in the industry.
Last year, the SEC adopted rules to rein in the business practices of credit rating agencies and require more disclosure about a security's underlying assets. Credit agency employees are banned from rating the same product they structure, as well as from negotiating fees for the product they helped rate.
The SEC proposed differentiating structured products from corporate bonds and removing most of the references to ratings in federal securities rules, but has yet to make a final decision.
The latter was criticized by the mutual fund industry and Wall Street players who said requiring highly rated securities for money market funds gives investors faith in the funds and creates standards for assessing credit risks.
However, some investment managers back the idea of relying less on the credit rating agencies.
If you can't come up with the analytic yourself, you shouldn't be investing, said Max Bublitz, chief strategist with SCM Advisors in San Francisco.
Support from the White House may make it easier for the SEC to work against industry's wishes.
The largest rating agencies S&P, Moody's and Fitch have been berated for not doing due diligence before assigning top ratings to structured products that later deteriorated when the U.S. housing market collapsed.
A Moody's spokesman said the agency was looking forward to reviewing the detailed proposal. Fitch Ratings said it was supportive of the concepts of the administration's plan. S&P had no comment.
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