CFI Institute Survey On Ratings

Posted by Bull Bear Trader | 7/08/2008 06:25:00 AM | | 0 comments »

The WSJ is reporting on a survey of 96,000 investors, brokers, and analysts conducted by the CFA Institute. The survey found that many of its members want a new regulatory body to oversee rating firms, along with a different set of ratings for structured products, such as for mortgage-backed securities and CDOs. Amazing, the CFA survey found that 11% of the 1,940 respondents globally said they had seen a ratings firm change a rating as a result of pressure or influence from an outside party, such as a bond underwriter.

Around 47% of respondents said regulators should force ratings firms to use different symbols for structured-finance products that differ from ordinary corporate debt, while 42% said they should not. Even with current problems, the number voting for change is significant, given that changing from the AAA scale would be costly and may initially add even more confusion at a time when the credit market is already in a tenuous state. The article mentions how "The SEC proposed a new rule in June that would give ratings firms the choice between using new symbols for structured products or publishing more research about the products' risks. "Given the level of confusion, we felt there should be a more overt requirement" to use different symbols, said Mr. Schacht." I guess we don't need more information about the risk, just a different symbol system. I find it interesting how we cannot have both. I realize that is not exactly what is being said, but it is telling nonetheless. While ranking from 1-10, or something similar would be clearer when distinguishing the move from say, A to Baa, does it really help one understand the risk any better?