Janet M. Tavakoli, President of Tavakoli Structured Finance, Inc. announces in a report that the firm has revoked the Nationally Recognized Statistical Rating Organization designation of the ten credit rating agencies.
Ten rating organizations are designated Nationally Recognized Statistical Rating Organizations: Moody’s Corporation; Standard & Poor’s Ratings Services (S&P, part of McGraw-Hill Cos., Inc.), Fitch, Inc., Best Company, Inc., DBRS Ltd., Egan-Jones Rating Company, Japan Credit Rating Agency, Ltd., Kroll Bond Rating Agency, Inc. (f/k/a LACE Financial Corp.), Rating and Investment Information, and Realpoint LLC. Moody’s and S&P are the most influential and have the most market share. Ratings, particularly those of Moody’s and S&P, are built into the global regulatory and market framework.
Ostensibly the U.S. Securities and Exchange Commission (SEC) qualifies the NRSRO designation. The SEC’s series of failures to check the creation and sale of hundreds of billions of dollars of blatantly misrated securitizations leading up to the financial crisis are beyond the scope of this report. It’s worth noting, however, that if the Food and Drug Administration failed to check the sale of tainted meat that repeatedly sickened a large segment of the population, we would demand a top to bottom overhaul of the organization and its methods.
In February 2007, the SEC sought comments about the steps it should take to regulate the rating agencies. In my letter to the SEC dated February 13, 2007, I called for the SEC to revoke the rating agencies’ designation as Nationally Recognized Statistical Rating Organizations (NRSRO). Ratings for structured products were based on smoke and mirrors.
In upholding the NRSRO designation the SEC and Congress are as irrelevant to the truth as Galileo’s inquisitors when they forced him to recant his upholding of Copernicus’ idea that the earth moves around the sun. Fundamental truths are not changed by arbitrary legislation like Congress’s Credit Agency Reform Act of 2006, meant to improve ratings quality, or by the SEC’s regulation. Since the SEC failed to act, I now revoke the NRSRO designation for all credit rating agencies for every class of credit rating with the exception of corporations not engaged in structured finance in a meaningful way. Specifically, this revocation is for the following rating classes: structured financial products including, but not limited to, structured credit products, asset backed securities, and synthetic securitizations; financial institutions (including brokers or dealers and hedge funds), insurance companies, and sovereigns that have bailed out their banking systems and continue to fund them.
The report, “Tavakoli Structured Finance Revokes the Credit Rating Agencies’ NRSRO Designation: Issues and Solutions for Restoring Credibility to the Credit Rating Agencies and Rehabilitating the Alternative Banking System,” July 26, 2011, provides further background on this action focusing on the top two rating agencies, Moody’s and S&P, and suggests a multi- year process required to restore a credible NRSRO designation for the rating agencies.