Saturday, April 24, 2010

Rating Agencies - Gaming the System?

Real Property Appraisers are subject to a myriad of regulations, must comply with standards and guidelines promulgated by Federal Agencies, Government Sponsored (OWNED) Enterprises, state governments and state agencies. Many appraisers have effectively lost their ability to compete in the market on the basis of their skill, experience and service because of a negotiated settlement agreement (HVCC), initiated because of allegations of illegal and unethical business practices by non-appraisers.

Appraisers have taken it on the chin for the excess that caused the Savings and Loan collapse in the 1980s, and are now the scapegoat for the ineptitude of others involved in the mortgage meltdown of the 2000s. Sure, some of the current problems are due to inept and corrupt appraisers, but it's time to focus the investigative light on much bigger fish.

A few months ago, Appraiser Active wondered about a Code of Conduct for the rating agencies. After all, the rating agencies analyse and offer an opinion of the value and risk for an investment in the hundreds of millions of dollars. Residential appraisers, on the other hand, provide value opinions on very small parts of this pool.

Via Calculated Risk, we found a story about the recent grilling of the chairman and chief executive of Moody's Corp., Ray McDaniel.

Moody's chief Ray McDaniel, under questioning, said that he didn't think his company had continued to rate complex deals backed by U.S. mortgages after it and competitor Standard & Poor's jolted the markets in July 2007 with massive downgrades of earlier deals.

"I apologize, I do not recall that," McDaniel said.

The panel's chairman, Sen. Carl Levin, D-Mich., then presented him with documentation that both Moody's and S&P gave investment-grade ratings to a Citigroup deal in December 2007, worth almost $400 million, backed by shaky subprime loans that by then clearly were toxic.

The point Levin was making — and made repeatedly — is that credit-rating agencies did whatever was needed to get lucrative fees, some as high as $1.4 million, for rating complex deal.
While other Wall Street executives have expressed contrition when they appeared before Congress, McDaniel and former S&P President Kathleen Corbet were unapologetic on Friday.

Throughout the day in earlier testimony and in e-mails released by Levin, however, former Moody's and S&P officials told how they were pushed out or quit in frustration because managers badgered them to "massage" complex deals until they could land the business.
Investment-grade ratings gave investors the illusion of safe bets, allowing big Wall Street firms such as Goldman Sachs to peddle the securities across the globe. Moody's and its chief competitors were key players in the prelude to a near meltdown of global finance in September 2008.

Called to appear before the panel, Richard Michalek, a former Moody's vice president and senior credit officer, described the ratings process for deals that could bring more than $1 million in fees as a "must say yes" atmosphere.
In one e-mail presented by Levin, an S&P employee inquiring about evidence that subprime lender Fremont General was showing problems with poor underwriting was told not to worry about it. Levin seized on this e-mail when grilling Susan Barnes, an S&P managing director, angrily asking her why relevant information and poor performance was discarded.

"Why doesn't the supervisor say, 'Damn right, it's relevant,'?" demanded Levin, eventually coaxing a response from Barnes
Read the whole thing

Why, when there is clear evidence of the fee being paid having an effect on the opinion rendered, is there no movement to provide a firewall between the securitizer and the rating agency? Why all the attention on appraisers?