Fitch Takes The High Ground

I doubt that anyone has bashed Fitch as much as I have over the past year. Here are a few examples that I have made numerous references to:

• Fitch Discloses Its Fatally Flawed Rating Model,
• Any Credibility Left At Fitch?
• Time To Break Up The Credit Rating Cartel

Tonight I am going to take a different stand. The reason is Fitch is standing up to MBIA. Let's take a look:

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.

My Comment: I talked about MBIA'a incredible demand in Amazing Action In Ambac, MBIA

MBIA Chief Executive Jay Brown defended the firm's decision and said the company has started to generate new business.

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.

My Comment: The likelihood is the SEC does not look into this.

Fitch's decision to keep rating MBIA is a positive development, according to Joseph Mason, associate professor of finance and LeBow Research Fellow, at Drexel University's LeBow College of Business.

"This is the kind of market discipline we need to get back to," Mason said. "Before the 1970s, there was a very prevalent traditional of unsolicited ratings. This kept the agencies that get paid to do the ratings in line."

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.

My Comment: This is not perception. This reality. And the reality is companies will only disclose data to firms who will look the other way when it is bad.

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.

My Comment: There is no "may" about this. Good Lord what wimpy writers we have these days when they have to hedge straight forward facts with "may".

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."

My Comment: Bingo. And that is why the current model needs to be discarded.

Sean Egan, president of Egan-Jones Ratings, an agency that's paid by investors rather than issuers, goes further, arguing that any confidential information given to ratings agencies should be disclosed to all investors.

MBIA doesn't provide Egan-Jones with the information it requests "because we're bearish on them," he noted.

MBIA said Monday that it expects $200 million in mark-to-market losses from its credit-derivative business and said Fitch's insurer-financial-strength ratings, or IFS, can cause "serious volatility" in how the Armonk, N.Y.-based company is viewed in the equity markets.

Brown said it was an appropriate time to ask the credit-rating agency to no longer provide its IFS ratings.

My Comment: Nothing could be more inappropriate than to withhold information because it is detrimental.

It is going to take a long time to restore credibility at Fitch but this is a step in the right direction. Another step would be to publicly state a policy they refuse to do outside business with the companies they rate.

No Love Affair With Fitch

I have no love affair with Fitch. They have made massive mistakes over the past few years and a wimpy one notch downgrade on MBIA would be another one. Three grades is insufficient but I would take that as an act of good faith.

It's important to remember however, that every journey begins with a single step, and this is a big step in the right direction. I applaud Fitch's stand against MBIA while asking MBIA "What exactly is it you want Fitch to destroy?"

If Fitch continues to take the high ground, it can regain credibility in due time. This is a welcome start, nothing more, nothing less. We now need to see followup action.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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