The rating services testified before the US Congress in the fall of 2007 that
- they did not have any special access to loan performance data and instead had the same access to loan performance data that investors and other market participants had, and
- this loan performance data was inadequate for making timely updates to ratings.
The Market Group is proposing using once-per-month data in its version of the ECB's ABS data warehouse. The is the same frequency of disclosure that the rating services thought was inadequate for making timely rating updates and that the US SEC is investigating for its role in the rating services committing fraud.
How exactly is an ABS data warehouse that offers once-per-month disclosure suppose to restore investor confidence?
Should the ECB finally decide to abandon support for the Market Group's efforts, my firm is ready to step in and offer, using its patented information infrastructure, a conflict of interest free ABS data warehouse that provides all market participants with the loan-level performance data on the observable event basis that is necessary for restoring investor confidence.
However, it is highly doubtful that the ECB will stop supporting the Market Group.
Like the US Federal Reserve, the ECB does not want to ever publicly acknowledge making a mistake. This unwillingness is related to their efforts to conduct monetary policy independent of politics - if you publicly acknowledge a mistaken policy in one area, it opens you up to potentially having to acknowledge mistakes in another area.
Unfortunately, central bankers do not consult in an area outside of monetary policy with someone like myself who has the relevant subject matter expertise. Instead, central bankers set up a technical working group that lacks this subject matter expertise and end up adopting fundamentally flawed policies that cast significant doubt on the competence of the central bankers.
For example, the ECB now finds itself supporting the Market Group and its ABS data warehouse even though the European Union competition committee is investigating Markit and saying that financial information data vendors need to be free of all conflicts of interest.
Why should the ECB stop its flawed policy of supporting the Market Group now?
Perhaps because European financial institutions that are covered under Article 122a of the Capital Requirements Directive are required to know what they own. It is hard to imagine that the combination of the rating services saying once-per-month is inadequate for timely rating changes and the US SEC thinking that once-per-month data is out-of-date supports the idea that financial institutions know what they own.
If the ABS data warehouse does not support the idea that financial institutions know what they own, then the ABS data warehouse is essentially useless in Europe and highly unlikely to restore confidence in the structured finance market.
Hopefully, the ECB will decide that it is better to acknowledge their mistake, adopt my solution and restore confidence in the structured finance market. [please note, this folly was not limited to the ECB, but was also joined in by the Bank of England. The BoE accepts as collateral ABS securities' eligibility with useless once per month reporting.]
U.S. securities regulators are weighing civil fraud charges against some credit-rating companies for their role in developing the mortgage-bond deals that helped unleash the financial crisis, according to people familiar with the matter.
The Securities and Exchange Commission's long-running probe into the deals has widened to the major credit-rating firms, including Standard & Poor's, the people said.
The leading ratings companies have been criticized by lawmakers as "key enablers" of the financial meltdown, helping to fuel the $1 trillion Wall Street mortgage-securities machine before the boom ended.
But the major ratings firms have largely avoided any regulatory crackdown and beaten back private lawsuits. Their business has rebounded as financial markets regained their footing.
Now, SEC officials are focusing on the question of whether the ratings companies committed fraud by failing to do enough research to be able to rate adequately the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals, according to people familiar with the matter.
It is a common tactic for regulators to accuse financial firms of fraud for allegedly misrepresenting information to investors, either recklessly or intentionally, according to lawyers.
In the case of the rating companies, the firms could face allegations from the SEC that they relied on incomplete or out-of-date information supplied to them on the pools of loans in the mortgage-bond deals or ignored clear signs of problems among subprime loans and so gave unduly high ratings to slices of the deals that were then sold to investors, say people familiar with the matter.
The SEC is looking closely at the conduct of Standard & Poor's, a unit of McGraw-Hill Cos., said people familiar with the matter. They said the agency is also reviewing the role played by Moody's Investors Service, owned by Moody's Corp., in relation to at least two mortgage-bond deals.