New York State Insurance Dept. Calls Moody’s Bluff on Defiance

Given how beleagured ratings agencies are, you would expect them to adopt the usual best policy when in trouble with authority figures: act terribly contrite and use all sorts of apologetic language without admitting to much and/or admit profusely to stuff you cannot deny, and make extremely vague but very earnest promises to do better.

It is quite bizarre to see Moody’s engage in the opposite tactic, of refusing a request by the New York State Insurance Department to discuss its ratings methodology.

As a Reuters article discusses, Moody’s would appear to have a fair bit to lose in this power struggle. Insurers are the biggest users of ratings, and the state regulators are coordinating an effort to reduce reliance of their charges on ratings as far as complex products are concerned. Those of course are far and away the most profitable to the ratings agencies.

The article misses one possibility. A judge recently issued a ruling that threatens the ratings agencies’ First Amendment exemption from liability, at least as far as ratings on complex deals are concerned. Might Moody’s be afraid of answering questions about its ratings process out of concern that it might say something that could be used as evidence in a trial?
From Reuters:

Hampton Finer, deputy superintendent of insurance for New York, told Reuters in an interview late Saturday that concerns about Moody’s arose after the credit-rating firm turned down an invitation to attend a regulatory hearing on Thursday, where it was to be questioned about its ratings process, particularly in light of the financial crisis.

“If we don’t feel like we can get answers to our questions, the question is if we should put them on our ARO (acceptable rating organizations) list,” said Finer.

Finer added that Moody’s had been cooperative in answering most, but not all, questions in a regulatory questionnaire earlier in the year.

“We are a little stunned,” that Moody’s refused to attend the hearing, he said. “This is not going to be like a congressional hearing. No one is out to embarrass them.”…

With nearly $3 trillion of rated bonds, the insurance industry is the largest sector of the U.S. financial services industry to rely on capital ratings…

The NAIC, which represents state insurance regulators, wants to lessen its reliance on the ratings firms, according to a March report. The group has also held discussions over whether to launch its own system for assigning ratings…

Other firms approved by the NAIC to rate insurer-held securities — Fitch, S&P and DBRS Limited — have agreed to answer questions at the hearing on September 24.

The SEC is floating some reform ideas on this front.

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One comment

  1. DrPsycho

    So……..the regulatory agency is “stunned” that Moody’s turned down their “invitation”, and hurries to reassure them that “no on out to embarrass them”.

    Nothing spells C-A-P-T-U-R-E so clearly.

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