Moody’s Critical of Some New ABS Structures

Last week, Moody’s published a report which seems to be openly critical of its brethren NRSRO’s (Nationally Recognized Statistical Rating Organizations) for some of their more recent work in asset-backed securities.  Moody’s concerns look to be aimed at some of the “fringier” asset class structures that have hit the market over the past several months.  Asset classes such as sub-prime auto seem to be in their crosshairs.  The stated concerns include issues such as the ability of smaller and thinly capitalized issuers to meet each of the representations and warranties promised to holders in the related bond offerings.

We have no doubt that Moody’s has ample data and basis for their warning to ABS investors about the loosening of credit standards.  However, it really does remind you of the days before the crisis when each of the major rating agencies took turns beating up the criteria of the others in an attempt to either curry the favor of investors or, unfortunately, to bully issuers into seeking a rating from the squeaky wheel.   Is this report a breath of fresh air and a signal of a sustainable “behavioral change” for the rating agencies or is it a signal of a return to “competitive driven behavior” which seemed all too commonplace prior to the credit crisis?

Time will tell.

About markferraris
Managing Principal Orchard Street Partners LLC

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