Arming investors with information on the securitized products they buy is viewed as a key to maintaining market discipline, but that alone might not be enough, Adam Ashcraft, senior v.p. & head of structured product, Federal Reserve Bank of New York, said during Monday Global Securitization Policy Reforms panel at the American Securitization Forum conference in Las Vegas. “One line of thought is that more effective disclosure is really enough, and that if we get more information into the hands of investors, that, ultimately, the market will provide discipline,” he said. “But I think we don’t need to look further than the CMBS market, where there really was meaningful information…in the hands of B-piece investors who actually had leverage vis-a-vis sponsors, to realize that probably is not going to be enough.” Ashcraft noted that the views he expressed on the panel were not those of the Federal Reserve.
The ultimate solution is less than clear, but what does seem certain from the tenor of pending regulatory reform is that ratings agencies will have a front-and-center role in governing issuer behavior. The ratings process, however, has a bevy of kinks to work out. “Regulators have put the ratings agencies in a very difficult position,” said Christian Moor, policy advisor at the European Banking Authority. The for-profit agencies are being asked to behave like nonprofit organizations. “There is a difference between [providing] an independent comparison and making a profit,” he said. Moor also noted that his views were not meant to represent the EBA’s stance.
Ashcraft, who helped engineer and implement the Federal Reserve’s Term Asset-Backed Loan Facility program, said his experience underwriting deals for inclusion in the TALF program left him with doubts about ratings agencies’ ability to keep from sparing the rod. “At the end of the day, if ratings agencies are going to be an important part of how we [reform] securitization, we’re going to need to do a lot better,” he said.
Ratings shopping by issuers is built into the process, he said, drawing on the TALF experience. “Underwriting banks are really focused on best execution, not just on some transactions but on every transaction.” And making the agencies compete against each other on specific deals actually made the problem worse, giving issuers more leverage to pit the firms against each other.
And the agencies may not always have enough information themselves to do the job right. “[Sometimes] the ratings agencies don’t even have cash flows, they rely on the sponsors to provide those for them.”
In the end, Ashcraft said, the best thing may be to give investors and ratings agencies the same amount of information. But there’s a long way to go. “It’s very clear that until we get Regulation AB in place, investors generally lack adequate information to do their own due diligence on transactions,” he said. “There’s limited granularity and depth of data to actually build the credit risk models that we need …to actually do real analysis on transactions.”