Another Washington Fail

I could write for my blog post a scathing commentary about the risk in which Congress has placed this country with its game of let’s-play-chicken-with-the-debt ceiling.

But I won’t and not just because now, at 8 pm ET on Sunday July 31, it appears that Congress finally, actually lurching, however clumsily, to some kind of resolution. I won‘t comment beyond that because, really, what does one say about this kind of irresponsibility?

I could also write how I’d been planning this weekend to finally replace my washing machine, which threatens the flood the basement every time I do a load - but I decided to hold off until I see what happens with the debt ceiling - and perhaps what will happen with the economy over the next few months.

Multiple this indecision, this wait-and-see by the millions of American consumers who are also pulling back from purchases and what do you have? An economy in stall. I won’t write about that because, well, I already did. On Friday GDP for Q1 was revised to an pathetic 0.4% growth rate from the earlier reported 1.7%. Q2, according to the Commerce Department, registered an annual rate of 1.3% in Q2 and I am too afraid to contemplate how that might be revised.

So what is there to discuss? As the headline suggests, this column is a rant about (yet another) Washington fail.

And so it is: namely, the apparent failure of Dodd-Frank to stop one of the more glaring flaws of the old system that led to the crash in 2008: the shopping of rating agencies by issuers -- as could be seen in Standard & Poor’s shocking announcement last week that it was reviewing its methodology for commercial mortgage-backed security ratings and thus would be unable to rate a Goldman Sachs & Co. and Citigroup $1.5-billion CMBS. The investment banks pulled the offering off the market as a result.

Adam Tempkin, once communications manager for Standard & Poor's structured finance group from 2002 through 2009, and now reporting for Reuters connected some of these dots for readers on Friday.

One dot is that the deal was also rated by Morningstar, a newcomer to the ratings space, but without a stamp of approval from one of the big three, Goldman and Citigroup felt the offering had to be withdrawn. (So much for injecting more competition into the space).

Another dot is the apparent open secret in the industry, according to Tempkin: namely that rating agencies’ approach to securities is still diverse enough that issuers still shop around.

"Along with the concern over having a new rating agency, several investors suggested rating shopping may have transpired on the transaction," Darrell Wheeler, head of CMBS strategy at Amherst Securities, told Tempkin.
 
"This suggests that the new issuance market still faces issues with rating agency credibility and investors confidence with those ratings."

There are many layers to this story, of course, another being that S&P rated a $1.5 billion CBMS that was even more aggressively underwritten than this one. Why the discrepancy and its sudden about face is prompting much speculation.

But the comments about rating shopping gives one pause. Dodd-Frank is barely a year old; many of the regulations have yet to be formulated. Those that have, have been met with a great deal of displeasure from the structured securities industry.  

Granted, this was a major piece of legislation - but at least it was crafted over a period of time with a lot of input from stakeholders. I shudder to think what Congress is throwing together tonight, and the consequences, both expected and unforeseen it will have.