Independent Ratings Agencies Out of Control (MCO, MHP, MBI, ABK)

If you think the "independent ratings agencies" are your friend and are out there looking out for your best interest, you have already been told time after time that they are not.  We’ve said it, CNBC has said it, analysts have said it, and so on…… Today is another example.

Moody’s (NYSE: MCO) has made comments that are hurting financial guarantor and bond insurance players.  Moody’s has said that MBIA inc. (NYSE: MBI) is at a greater risk of a capital shortfall than had previously been noted.  It is currently reviewing its current rating and ability to fund its obligations.  MBIA Inc. is seeing its shares hit by about 13% at $28.40, and that got it to a new 52-week low.

Ambac Financial Group, Inc. (NYSE: ABK) has also seen its stock hit hit by 6% after these comments.  Frankly, the net effect of this is that it drives up the cost of insuring bonds, getting accurate coverage and analysis on securities, and spills all the way down the food chain.  It is affecting the ability for municipalities to offer new municipal bonds and has affected th value of municipal bond funds.  It also affects companies that "may need to borrow that don’t need to borrow today" because of the potential costs.

McGraw Hill (NYSE: MHP) is the parent company of Standard & Poor’s, and it has a similar model for its debt rating business.  The difference is that 24/7 Wall St. actually uses some of the S&P equity ratings analysis because it is more independent and objective in our opinion.  McGraw Hill is also a more diversified publisher.

I have personally been on the record stating that if certain Enron transactions were structured differently and adequately rated by the debt ratings agencies AHEAD of the fraud realization (even after the fraud that was occuring there) and without some of the certain debt rating triggers and subsequent stock price triggers that the company would have actually survived as an entity.  Frankly, I know that is a very controversial statement that can be argued until the oil workers come in from the field.  Don’t bother asking because it’s ancient history and won’t be responded to or addressed.

But there is a severe problem here.  That is that the ratings agencies have only been downgrading these CDO and company ratings all the way down the chain and other derivative ratings recently.  They either didn’t know what they are looking at or didn’t know how to evaluate them, but either way it’s a real problem that hasn’t gotten enough attention.

The business model has been flawed, and partly responsible for a portion of the mess in the debt markets right now. "Pay us to assign a rating to you, and we’ll give you a fair and accurate rating that will allow investors to decide to invest or not. Then we’ll charge the public and subscribers to get access to the research."  I won’t even mention the various potential conflicts of interests there.

Jon C. Ogg
December 5, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.