Superstorm Sandy wreaked havoc not only on the people of the tri-state area, but also on insurance companies. In a recent edition of Credit Matters, a talk show produced by Standard & Poor’s, Taoufik Gharib, director of S&P’s insurance sector, discusses the insurance lines most affected by Superstorm Sandy, the uncertainty that remains in industry loss estimates and the potential for ratings action that may still result.
The Justice Department is investigating Standard & Poor’s for improperly rating the garbage mortgage-backed securities that tanked the economy once the world caught on that they were toxic assets.
The anonymous folks who leaked this info to the press claim that the inquiry began prior to S&P’s downgrade of U.S. debt, but many have speculated that the fervor and depth of the probe has ratcheted up since the nation lost its AAA-status.
Either way, the law dogs are — finally — poking around in the ratings world.
he Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.
It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.
Any inquiry should of course involve looking at all three. Each overrated the used diaper mortgage-backed securities to a baffling degree. Whether or not it was incompetence or something more insidious is really the only question, I have. I presume they are capable of both.
But if this investigation focuses solely on S&P then it falls even more into how one talking head on MSNBC’s The Daily Rundown described it: more of a Washington story than a Wall Street one.
Honestly, the only weird thing about hearing today about an investigation going on right now is that it was something I expected to hear in 2008.
In related news, and not just to toot our own horn, but I would feel remiss not to mention that our Risk Management magazine cover story this month was titled “The Future of Ratings” and examines “how rating agencies gained so much power, helped tank the economy and figure into the future of risk assessment.”
I’m not going to pretend that I knew just how much play rating agencies would be getting in August when I commissioned the piece a few months ago. I’m many things, but clairvoyant is not one of them. But the piece speaks to many of the questionable issues surrounding the ratings world that have been curiously dormant in the mainstream media for years until recently.
A wonderful writer, Lori Widmer, did a fine job so please do give it a read.
Let’s hear it for Jesper Andersen and Toby Segaran, two geniuses who saw an opportunity after AAA-rated companies began to fail in the midst of the economic collapse. Their solution? Sounds obvious — a more effective corporate credit risk modeling system.
So the two entrepreneurs and analytics gurus put their heads together to form freerisk.org, which is:
a project with the goal of making freely available the data, algorithms and tools necessary to perform risk modeling. We believe that risk management is too important to society to be an arcane subject or competitive advantage.
And the risk management community screams “Hallelujah!”
Most of the numbers are crunched by a team of volunteer finance fanatics who rate companies using crowdsourcing. The site even offers an open application programming interface (API), which lets users design their own risk-crunching models.
Will this site serve to forever correct the corrupt and biased ratings of agencies such as AM Best, Moody’s and Standard & Poor’s? Maybe not, but it’s a great alternative.
Chairman Paul Kanjorski presided over the congressional hearing involving state representatives, the NAIC, the Treasury Department, the Office of Thrift Supervision and Standard & Poor’s.
“We meet today to scrutinize American International Group,” Kanjorski began. He continued, explaining that the reason for the current and future meetings was to discern several things – namely how AIG got to where it is now, how they are using (or misusing) taxpayer bailout funds and how and when the company will pay back its bailout money, plus interest.
Time was then given to the always-outspoken Representative Barney Frank from Massachusetts, who undoubtedly received nods of satisfaction from the viewing audience.
“Something is seriously out of whack and AIG needs to fix it now,” Frank stated. “Many Americans have made personal sacrifices to make it in this difficult time – AIG should do the same.”
Frank then read from the AIG contracts in question, stating the specifics of the bonuses, which said if the company has a net loss for the year, the employees still receive their bonuses.
“This is a problem with compensation structure,” Frank lambasted. “They give themselves contracts that effectively insulate them from losses. We should exercise our rights as owners of this company and bring about lawsuits.” Referring to the breaking of the contracts in question, he made vocal what most Americans are thinking right now: “the magnitude of the losses is so great that we are justified in rescinding the bonuses.”
Representative Spencer Bachus from Alabama blamed Washington, the regulators, and Congress for failing to do their jobs.
“However, the blame game needs to be secondary,” he stated. “Recouping the taxpayer’s money is first and foremost. But will AIG ever return to profitability and will they ever be able to return the money.”
A valid question indeed.
Chairman Kanjorski then turned the questioning to the panel of three individuals representing the NAIC, Standard and Poor’s, the OTS and the Treasury Department. From the insurance regulator perspective- the head of the NAIC claimed that AIG has become the poster child for systemic risk. He then revealed the obvious – that there are “threats on horizon in terms of reputational risk in regards to the insurance division of AIG.”
After two hours of questions and statements, the meeting broke with heckling from some in attendance who held signs reading “honest taxpayer fund.”
You can watch the full video of the hearing here. Another hearing is set for March 24, when Congress will hear from Treasury Secretary Tim Geithner, among others.