Memo to MBIA: Now Is Not A Good Time To Fire Fitch

From the “truth is stranger than fiction” department: When I first saw the headline Friday that MBIA (MBI) had asked Fitch to remove its ratings, I thought, “Nah, can’t be. Certainly not after all of the fuss on rating agency independence.”

But that’s just what happened: MBIA asked Fitch, which has been the most negative of all ratings agencies, to stop rating six of its companies and subsidiaries. It will, however, continue to welcome its ratings on certain outstanding debt on the parent company, MBIA, and MBIA Insurance Corp.

Seems, according to press reports, MBIA didn’t like Fitch’s model, which would’ve required the company to put up more cash. An MBIA spokesman also said something about Fitch’s fees being too high.

Whatever the reason, I wanted to pass on this memo to MBIA: When the world is clamoring that debt rating agencies, which you pay, aren’t independent enough, the last thing you do is fire the one that appeared the be the most independent.

Comments

[ChaulmoograOil:]

This should enhance Fitch's reputation, and hurt MBIA's. It implies that Fitch has more integrity than MBIA cares to fund.

Ultimately, though, the cureent "the judged pay the judges" model of debt ratings must somehow be scrapped for a better way.

2008 Mar 09 01:33 PM

[Sunset Carson:]

There is a conflict of interest if one is paid by the issuers of securities to rate their securities

Institutional investors paid the rating companies for full access to their research.

The rating companies got paid twice for providing dubious ratings.

Who authorized the rating companies? The state of New York? Who provided oversight?

It proved to be a systemic failure. But a financial success for the rating companies.

2008 Mar 09 01:47 PM

[BondGuy:]

Actually, the grander "truth is stranger than fiction" moment was Spitzer and Danello declaring victory on the Ambac rescue. But this is pretty hilarious, I agree.

2008 Mar 09 03:09 PM

[Tom Armistead:]

Here is a quote from Fitch's commentary on ABKs recapitalization:

"Over the intermediate term, Fitch believes it will be very difficult to stabilize the ratings of Ambac, or any of its competitors, exposed to a sizeable concentration of SF CDOs, until they can effectively limit the downside risk from the SF CDOs through reinsurance or other risk mitigation initiatives."

I would interpret this to mean Fitch expects to continuously increase its demands for capital to support triple A ratings where there is CDO exposure. Their requirements are twice those of either S&P or Moody's.

MBI wrote a letter to Fitch going over their reasons quite succinctly, it is available at either companies website. FItch's analysis is costly, their methods are different from what the other rating agenices employ, and their capital requirements are much larger for SF and much lower for PF. Fitch has only a 10% share of SF ratings.

It appears Fitch has made itself irrelevent.

2008 Mar 09 04:23 PM

[drmalaka:]

Tom, don't you feel a little worried defending MBIA or Ambac? Lots of people have done that for the past year and they all have egg on their faces.

How can you believe anything these confirmed liars say?

So we will insure bonds with three rating agency AAA ratings but if any of those agencies lower our rating we will fire them and keep the good ones. By good I mean those that lie for us and keep us afloat another day.

2008 Mar 10 01:58 AM