TSF Announces the Firm Revokes the Rating Agencies’ NRSRO Designation

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.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

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About Janet Tavakoli 34 Articles

Affiliation: Tavakoli Structured Finance, Inc.

Janet Tavakoli is the founder and president of Tavakoli Structured Finance, Inc. (TSF), a Chicago based consulting firm providing expert experience and knowledge about maximizing value in the capital markets in the face of complexity and uncertainty. TSF provides consulting services to financial institutions, institutional investors, and hedge funds.

Ms. Tavakoli was years ahead of the financial industry predicting lax underwriting and misrating of structured financial products would result in the collapse of the global credit bubble. She also predicted the collapse of the thrift industry, Long Term Capital Management, and First Alliance Mortgage prompting Business Week to profile her as "The Cassandra of Credit Derivatives." [2008].

Ms. Tavakoli pointed out grave flaws in the methodology for rating structured financial products in her books, Structured Finance & Collateralized Debt Obligations (2003, 2008), and Credit Derivatives (1998, 2001). She wrote the first letter the SEC posted in February 2007 in response to its proposed rules for the credit rating agencies; she made the case that the NRSRO designation for the rating agencies should be revoked for structured financial products.

Ms. Tavakoli is frequently published and quoted in financial journals including The Wall Street Journal, The Financial Times, Business Week, Fortune, Global Risk Review, RISK, IDD, Chicago Tribune, Los Angeles Times, LIPPER HedgeWorld, Asset Securitization Report, Journal of Structured Finance, Investor Dealers' Digest, International Securitization Report, Bloomberg News, Bloomberg Magazine, Credit, Derivatives Week, TheStreet.com, Finance World, and others.

Frequent television appearances include CNN, CNBC, BNN, CBS Evening News, Bloomberg TV, First Business Morning News, Fox, ABC, and BBC.

Tavakoli is a former adjunct associate professor of finance at Chicago Booth (the University of Chicago's Graduate School of Business) where she taught "Derivatives: Futures, Forwards, Options and Swaps".

Janet Tavakoli is the former Executive Director, Head of Financial Engineering in the Global Financial Markets Division at Westdeutsche Landesbank in London. She headed market risk management for the capital markets group for Bank One in Chicago. Tavakoli headed the asset swap trading desk at Merrill Lynch in New York, headed mortgage backed securities marketing for Merrill Lynch in New York, and headed mortgage backed securities marketing to Japanese clients for PaineWebber in New York. She also worked for Bear Stearns heading marketing for quantitative research.

She is the author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008), and Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley, 2009).

During her career, she has been registered and licensed with the SFA, NASD, ASE, CBOE, NYSE, PSE and the NFA and has passed the series 7, 63 and 3 qualifying exams.

Ms. Tavakoli has a B.S. in Chemical Engineering from Illinois Institute of Technology and an MBA in Finance from University of Chicago Graduate School of Business.

Visit: Tavakoli Structured Finance

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