Truth Stranger than Fiction: MBIA Declines Ratings

I truly could not create a work of fiction like this. First of all, this whole rating agency game is a fiasco - let me give you the shorthand version. Basically a company who wants their financial instruments (debt) rated, goes to the bond insurers and pays them to rate their product. No conflict of interest, eh? So if you give good ratings you win more favor and more future business. That is step one of the hypocrisy.

Now lately, these companies (the bond insurers) have maintained their (cough) AAA rating despite dropping 90% in stock value and going hat in hand to the market or (behind the scenes) to banks asking for infusions. They price debt at 12-14% interest rates which no AAA company would ever need to ask for.

Why is this all happening? Because without those ratings the bond insurers could not get new business - and banks, already suffering massive casualties on their balance sheet would be forced to write down even more - a position some could not handle. So the mirage of AAA ratings continues... all in wink wink style.

Now to the title of this entry... in something that is so outrageous you almost have to laugh, MBIA (MBI) has asked one of the main rating agencies to stop rating it. hah! "We don't like what you have to say about us, so please... stop saying anything!" or "If you don't have something nice to say about someone, didn't your momma tell you not to say anything!" Honestly, this is so amazing and speaks to the shockingly pathetic state of our financial system - the wink wink, nod nod system keeping it all going with duct tape and staples. But it is amusing if nothing else....

• In the latest salvo in a now highly public war of words, ratings agency Fitch said it will continue to rate MBIA Inc.'s subsidiaries without charge, despite the bond insurer's request that it stop.
• The increasingly confrontational dialogue was initiated on Friday when MBIA asked Fitch in a letter to stop providing some ratings on the firm. That letter, released to the public, also asked Fitch to return or destroy data MBIA had provided to Fitch.
• In response, Fitch CEO Stephen Joynt said the agency plans to keep rating the bond insurer and questioned the company's reasons for trying to end their relationship. "It seems disingenuous at best to assert in your letter to investors published yesterday, March 9, that you 'intend to work with Fitch to perform the analysis needed to rate MBIA's debt securities,' while privately demanding return of the portfolio information and materials that you freely provided to support our ratings and that of other rating agencies for many years," Joynt wrote.
• Most ratings agencies are paid by the companies they analyze. That's created the perception of a conflict of interest because agencies may be less inclined to come out with lower ratings because they don't want to upset the firms that pay them.
• Ratings agencies also get confidential information from companies to help them produce more accurate ratings. But when companies restrict information to some agencies, as MBIA is doing with Fitch, the system may become even more skewed.
• One way around that is to introduce rules that require equivalent disclosure. When a company provides information to one rating agency, it has to give that to all other regulated agencies too -- probably via some sort of database, Mason explained.
• MBIA's request that Fitch destroy information suggests the company is very keen to stop the agency from rating it in future, Mason said. "It's expected that this information would remain confidential, but to ask that it be destroyed is really going the extra mile to stop Fitch rating them on an unsolicited basis," Mason said. "This betrays the bias that's currently in the system," he added. "MBIA is saying that because you're not financially tied to us anymore, we really don't want you rating us."
• "This whole controversy highlights the problems that exist with the industry structure, whereby a company can silence a rating firm if that company doesn't like the rating that's being generated," Egan said.

And this folks, is your US financial system... sad to see how ugly it is once the tide rolls out. I cannot wait for the new era of Sarbanes Oxley type regulation we will be seeing... as always, instead of being preventative with smart regulation we will be overreactive and overreaching, after the implosion that hurts many. This is our way. But this type of story... well I could not even make this up... so outrageous.

Comments

[Ex15:26:]

Hopefully Fitch will listen to MBIA and this whole thing will blow over and the collateral banks are holding will enjoy higher marks, and banks will begin to lend, and the Fed will fight inflation, and oil, gas, ag prices, and metals will drop, and the housing market will all turn around....... tomorrow!

Great article, unfortunately you didn't make it up and the entire credit and banking system expects it to work. Fitch better play nice or they'll get run out of town. It's interesting how they are suddenly taking their job seriously and aghast at how corrupt MBIA appears when all three of the ratings agencies have essentially been taking bribes for years.

I monitor credit ratings on insurance companies and the insurers drop the rating agencies all the time when they don't like what they are saying. Business as usual, it seems as though Fitch doesn't like it when MBIA is taking his toys and going home.

2008 Mar 10 10:47 PM

[R Carlson:]

Ratings are a well known scam. They have no predictive vlaue beyond about 18 months. Rating agenceis always madly cut ratings just before companies go under to save their "reputations". See Penn Central, Enron etc. etc etc.

2008 Mar 11 09:52 AM

[hattryx:]

this if how it should be done. make your money from subscriptions. let the market take over, and things will sort themselves out. can't wait to see the sissy fit cramer throws.

2008 Mar 11 10:14 AM

[vince v:]

Fitch, Moody's et al should create a category for this set of circumstances and give the companies that fit the criteria that rating. Let the marketplace decide whether they want to invest in companies with that rating OR let the SEC do the rating, free of charge, using GAAP, for all companies.

2008 Mar 11 01:11 PM

[Reinko:]

This MBIA stuff is indeed very weird. Back in the Summer of 2004 I already understood that there were some problems with the rating agencies. At that time I reseached future scenario's for the US$ and one of the conclusions was that US Federal bonds will lose their AAA rating.

Last year I emailed the chief economist David Wyss from Standard & Poors and I wanted to know why they never said a word on the subject of Federal AAA that will go down the drain.

Do you want to know how David reacted?

"There is no problem because Federal debt is only 50% of the GDP"

Now Mark, according to the info from that time: since when is 9.16 trillion half of 13 trillion? The incompetence and corruption is going on for a long long time already.

2008 Mar 12 05:47 PM