The likes of Moody’s, Fitch, Standard and Poor’s will increasingly feel the spotlight turned on them as the search for culpable parties leaves no stone unturned.
After all, they too got it wrong as they misjudged the creditworthiness of some sub prime mortgages and bonds backed by them.
Or did they?
Securitisation has become something of a loser in the fall-out from the credit crunch with unfair criticism being heaped at the doors of anyone who has been involved.
Heaven forbid if I admit to being involved in securitisation over dinner party conversation.
Along with the investment bankers I will be fighting for my life.
In the UK (forgive me if I stay focussed on the UK but it is closest to all our hearts) no Residential Mortgage Backed Securities deal or structure has blown up and no AAA bond investor has lost anything in the last 20 years or so of its history.
So in a sense the bond structures are holding up well and doing just what they are supposed to. In the US this has not necessarily been the case and this bad image of failed, complex and badly structured US deals has affected attitudes towards UK RMBS unfairly.
Ironic isn’t it that the Government is now offering to guarantee AAA bonds but based on all our experience to date the investors just don’t need that guarantee.
So what’s the problem and why aren’t investors investing?
Well of course it is in part due to lack of liquidity in the investment market.
It is also that there isn’t a secondary market where investors can trade their securities if they do buy them although the Bank of England Discount Window facility does provide some assistance here to bank investors.
But it is also down to “Headline Risk” where an investor daren’t invest because everyone knows that RMBS are “bad things” to invest in despite the lack of losses and defaults being evident although no one really knows why.
That is why we need a Bank of England Guarantee to transform the risk into UK Government risk and show the investors that the Government has faith in these bonds.
Which returns me to the role of Rating Agencies.
I feel that the time has come to set out some common transparent rules on what a stress scenario looks like. It is all very well having a complex “black box” approach but in these markets investors need to know precisely and simply how the rating was achieved and with a minimum common approach between the Rating Agencies.
This is not such a big thing to ask for and in my view is crucial for the re-establishment of the RMBS market.
Not only this, if we can achieve this transparency then it may be possible to persuade the Government to provide the guarantee down to the A level which would be much more useful and for higher risk assets such as first time buyer loans.
These will be key to kick-starting the mortgage market and stabilising the housing market and wider economy. So its not just investors that need this transparency of approach it’s the UK Government as well.
Rating Agencies have got a lot wrong but also should be given credit for getting the fundamentals of UK securitisations ratings correct.
It is time to de-mystify the whole securitisation and ratings game. If it means exploding some of the rocket science to make things a little clearer then so be it!