Banking Experts Offer Educational Web Site at TheRatingsDebate.com to Outline Ways to Improve Credit Ratings System for Structured Products

Share Article

Today, the debate among financial institutions has shifted away from mark-to-market and toward use of ratings to assess risk. Currently, the House and Senate are reviewing proposed legislation that gives the Securities and Exchange Commission (SEC) more authority to oversee the NRSROs.

As a result, structured products need more than a letter-based rating to evaluate and communicate that risk

Chicago-based Performance Trust Investment Advisors, LLC, a financial institution advisory firm, has created a virtual forum at a new educational web site--called TheRatingsDebate.com--to discuss what credit ratings really mean in structured finance and how the rating system needs to be strengthened.

Congress is reviewing proposed legislation that gives the Securities and Exchange Commission (SEC) more oversight over Nationally Recognized Statistical Ratings Organizations (NRSRO). NRSROs such as Moody's, Standard & Poor's and Fitch assess risk and rate bonds, including structured products such as mortgage-backed securities.

"We have launched this new web site to encourage detailed discussion on how the ratings system for structured products, such as private-label mortgage backed securities, can be greatly improved," said Rich Berg, Chief Executive Officer of Performance Trust Investment Advisors. "The risk behind structured products such as mortgage, auto or student loans is very different from that of a corporate bond," he said. "As a result, structured products need more than a letter-based rating to evaluate and communicate that risk," he said.

Letter-based ratings currently do not distinguish between a corporate bond which has only one issuer (single obligor) and a structured product such as mortgage bond which has many, even thousands of issuers (multiple obligor). The rating assigned to a bond estimates the risk associated with the probability of default--which is defined as losing one dollar of principal.

"You don't have a way to measure the risk of a partial default with the current rating system. You have an 'all or none' approach," Berg said. "Investors in multiple obligor securities need more than a measurement of the probability of default. They need to estimate the magnitude of loss (severity) to analyze the risk and value of the security," he said.

As a step in the right direction, the financial regulatory reform report from the Treasury Department includes suggestions that credit rating agencies should acknowledge the difference between structured and unstructured products "in a manner comprehensible to the investing public."

Performance Trust Investment Advisors previously launched a web site on mark-to-market accounting issues, highlighting how these accounting rules were destroying capital and preventing a strong economic recovery. Increased public awareness of the issues surrounding mark-to-market accounting rules led to the Financial Accounting Standards Board (FASB) issuing new guidance in April for fair value accounting rules.

"We hope our new web site, TheRatingsDebate.com, serves as a center for debate on this equally important topic of credit ratings," Berg said.

For more information and to hear the many voices on this subject, go to http://www.TheRatingsDebate.com.

About The Performance Trust Companies
The Performance Trust Companies are an SEC-registered investment advisor and FINRA regulated brokerdealer, with proprietary investment methodologies and products designed to accomplish investment objectives. Based in Chicago, Performance Trust focuses on educating fixed income investment professionals and assisting client institutions to invest through total return. For additional information, go to PerformanceTrust.com.

# # #

Share article on social media or email:

View article via:

Pdf Print

Contact Author

James H. Matson
Visit website