As we begin to address regulatory reform in the financial services industry there is a clear consensus view that the credit rating agencies played a role in fomenting the crisis environment.

In February 2007, Joe Mason and I presented a paper warning of the risks that CDO market problems would present in the capital markets and in the real economy. “How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?”

In May 2007, we presented a follow-up paper more specifically detailing the role the rating agencies played. “How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions”.

My recently authored “Toward an Understanding: NRSRO Failings in Structured Ratings and Discreet Recommendations to Address Agency Conflicts”
appears as the lead article in the current issue of the Journal of Structured Finance. In the article I detail the fundamental flaws in the NRSROs rating of structured securities, why those problems are unique to structured securities (as distinct from single issuer debt e.g. corporate, municipal, sovereign) and why the problem is not  solved by changing the “issuer pays” model nor using “market based” ratings. Instead I present a series of non-invasive recommendations that would resolve most of the problems in the ratings of structured securities. Such a resolution is fundamental to a revival of the ABS market and resumption of securitization activity on a sustainable and responsible basis.

I urge you to read the paper and would be more than happy to discuss it or respond to any questions you may have.

JSF Winter 09 – Rosner


NRSRO Failings in Structured Ratings and Discreet Recommendations to Address Agency Conflicts
Winter 2009 Volume14,Number 3
The Voices of Influence |

Category: Credit, Derivatives, Finance, Markets, Real Estate, Really, really bad calls, Research

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Failings in Structured Finance Agency Conflicts”

  1. leftback says:

    Speaking of agency failures, it looks as though the SEC may be catching up to another BIG Ponzi.
    Sir Allen Stanford’s Houston-Antigua operation sounds oddly like Madoff Securities.
    Inwestors may be getting nerwous…

  2. Marcus Aurelius says:

    From the charts alone, it would seem that a new scam was launched, and everyone who could immediately jumped on the criminal gravy train.

    We need a judicious application of law enforcement.

    If we take this badly-needed step, it will be clear to those tempted in the future that abrogation of one’s fiduciary duty will result in a degree of punishment that would make a Chinese executioner wince.

  3. pamtonia says:

    Great article! Only one question: how can they make more money if the recommendations are implemented?

  4. lb,

    to your mention:

    By DIONNE SEARCEY and ANNELENA LOBB in New York and JOHN LYONS in Caracas, Venezuela
    An investigation into wealthy financier R. Allen Stanford’s operations is intensifying, with the FBI looking into his financial group in the U.S. and regulators in Antigua scheduled to visit his bank there.

    Stanford Financial Group Co., which has more than 30,000 investors, has been recently advising clients that they can’t redeem their CDs for two months, a person familiar with the matter said. A spokesman for Stanford Financial said depositors may withdraw funds in accordance with the terms of their accounts.

    Getty Images
    Sir Allen Stanford at a cricket match in London in June 2008.
    Mr. Stanford, in an email to clients, said he has been infusing cash into the Antigua bank he controls, Stanford International Bank Ltd.

    The events come amid a widening investigation of Stanford Financial, a holding company jointly based in Houston and St. Croix for broker-dealer firms, an investment bank and wealth-management service.

    The Securities and Exchange Commission, the Financial Industry Regulatory Authority and Florida regulators entered the financial group’s branches in January and collected records, according to a person familiar with the investigation. Another person familiar with the investigation said the SEC has been looking at the certificate-of-deposit business since at least 2007.

    The Houston office of the Federal Bureau of Investigation also is probing the financial group, said two people close to the inquiry. The FBI declined to comment.

    In Antigua, Leroy King, administrator and chief executive of the Financial Services Regulatory Commission, said the SEC had been in touch with his office recently. Mr. King wouldn’t comment on precisely what the SEC is currently seeking. An SEC spokesman wouldn’t comment.

    Stanford Financial Group previously has been in the sights of various regulatory and law-enforcement agencies, according to the people familiar with the matter. Those people say the agencies now are focusing on certificates of deposit, which are marketed by the financial group’s wealth-management arm and sold by Mr. Stanford’s Antiguan bank. The CDs offer unusually high returns; for example, as of Nov. 28, a one-year, $100,000 CD paid 4.5%…


    Marcus Aurelius Says: February 15th, 2009 at 5:02 pm
    From the charts alone, it would seem that a new scam was launched, and everyone who could immediately jumped on the criminal gravy train.

    yes, sometimes *Reality /seems/ Real..

  5. KJ Foehr says:


    Here’s an eye opener,

    From Bloomberg,

    Japan’s Economy Shrank at Annual 12.7% Pace in Fourth Quarter

    STORY TO FOLLOW.Last Updated: February 15, 2009 18:51 EST

    Anyone have any context on this? Sounds scary, no?

  6. jpm says:

    You tell me how someone is incentivized, and I’ll tell you what kind of answer they’re going to give you.

    Applies to more than just the ratings guys.

  7. johnhaskell says:

    Some reports indicate that the SEC has been investigating Stanford for three years. In three years they could not figure out what Alex Dalmady figured out in half an hour.

    So yeah, you could say “the SEC is catching up,” but to make the sentence accurate the following phrase should read “with Alex Dalmady.”

    Anyway, all the depositors who thought they were earning 8% a year but who were in fact funding Stanford’s gold plated helicopter, will be reassured by the fact that the SEC investigated for three years while taking no action.

    Is it possible the irrepressible Meaghan Cheung was the case officer?

  8. craig k says:

    rating agencies, appraisers – go down the list of people who have conflicts of interest and should be held accountable much more than I’ve been reading about in the media.

  9. dead hobo says:

    Liars will lie until they become personally accountable for lies they told or permitted to be told on their behalf. No amount of regulation will stop liars from taking the money of others until personal accountability is introduced into the equation as a matter of routine.

    SarbOx introduced the concept of internal controls that management must develop and sign off on, under penalty of fines and jail. While I would guess that most typical accounting controls deal with ghost employees, fake receivables, fraudulent inventory, or similar things there is probably little or no control for those who perform credit ratings. Thus, there is nothing material for executives in charge of rating agencies to sign off on.

    Therefore, to make a lot of the ratings agency problems go away, you need to have a prison sentence hanging over the head of management if they fail to implement controls that fail to detect fraudulent ratings. A version of AS5 should be designed specifically for the financial ratings business. Also, since ratings are the business of a ratings agency, auditors need to be trained to ensure that the work product of the client isn’t fraudulent and, thus, not materially different than placing bricks in boxes and claiming it as inventory.