Tuesday, March 6, 2012

S&P blocked by banks after derailing Goldman's CMBS deal

Bloomberg ran an article that reaffirms the case for bringing ultra transparency in the form of observable event based reporting to structured finance.

The article discussed how banks are turning to other rating firms after S&P derailed a CMBS deal being sold by Goldman.  The clear intent of the action is to both hurt S&P financially and to send a message to the other rating firms to play ball.

What caught your humble blogger's attention is the fact that the rating firms are still being paid to issue a rating as part of the process for selling structured finance securities.

If there were ultra transparency in the form of observable event based reporting, market participants would have access to the current information on the underlying collateral before the security is sold.  Market participants could then independently assess this information or hire a third party to assess the information for them.

This would eliminate the need for a paid rating.

In the case of the rating firms, all the rating firms would have access to the data and could provide their own rating.  In fact, they might try to be the third party that is paid by market participants to assess the information disclosed under ultra transparency.

Standard & Poor’s is frozen out of the commercial-mortgage bond market by the biggest underwriters after derailing a $1.5 billion sale byGoldman Sachs Group Inc. (GS) and Citigroup Inc. last July. 
Since then, those banks along with JPMorgan Chase & Co. (JPM), Deutsche Bank AG and Morgan Stanley have bypassed S&P’s credit ratings as they issued $11.3 billion of debt linked to skyscrapers, shopping malls and hotels, according to data compiled by Bloomberg. 
They’re turning to Kroll Bond Ratings Inc. and Morningstar Inc. (MORN) after S&P, the world’s largest credit- rating company, forced bankers to pull an offering they’d already committed to sell, roiling the $600 billion market.... 
Ed Sweeney, a spokesman for S&P, said the New York-based company’s CMBS analysts weren’t available to discuss the situation. “We believe our ultimate success will be based on the value investors derive from the ratings and research,” he said in an e-mail. 
Ranking structured products such as CMBS and collateralized debt obligations is one of the most lucrative areas for rating firms. They generally charge between $1 million and $2 million to grade a CMBS deal, which are bundled loans tied to commercial properties sliced into securities of varying risk, according to a September paper by Andrew Cohen, a researcher at the Federal Reserve.... 
About one-third of investors polled in a Deutsche Bank survey said they preferred deals without an S&P ranking, the Frankfurt-based lender said in a Feb. 27 report. About 15 percent said they look forward to those rated by the new entrants. More than half said the rating companies didn’t play a role in their investment decisions....

“We didn’t think we would get on as many transactions as we did last year,” Eric Thompson, Kroll’s head of CMBS in New York, said in a telephone interview in February. “We view it as an indicator of folks in the marketplace looking for a fresh voice.”

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