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Opinion

S&P gets wiser, Realpoint moves in to fill the "gap"

Time for some rating agency news. S&P threatens to cut CMBS ratings, so people are rushing to Realpoint (news by Reuters), another yet-to-be-approved CMBS rating agency. (HT: Zero Hedge)

U.S. credit rating company Realpoint on Thursday said insurers may soon be allowed to use its commercial mortgage bond ratings and preserve capital if rival Standard & Poor’s moves to slash its designations.

S&P shocked the the CMBS market last week by advising that its new models, if adopted, would likely prompt ratings cuts on 95 percent of top bonds issued during the peak of the real estate cycle in 2007 and 85 percent of CMBS from 2006. S&P is mulling responses from a formal request for comment.

Some 50 insurers have contacted Horsham, Pennsylvania-based Realpoint over the last few days, saying, “you guys need to get approved” by the NAIC, Dobilas said.

“Realpoint acts as a trump card to any action that S&P takes,” he said. “We don’t perceive any problem” getting approved by the NAIC, he added.

Analysts fear the cuts by S&P would cause a wave of selling by investors, including insurers, who are limited to AAA-rated securities. Downgrades are also seen as a threat to a Federal Reserve program to boost lending in U.S. commercial real estate as the central bank currently requires bonds eligible for the program carry only AAA ratings.

First, the rating agencies go temporarily blind, seeing only $$ signs and forgetting that they have to actually rate the darn securities. By the time they remember, too many people have bought it, and those people get really pissed off; not because S&P did a bad job in the first place, but because they have to bloody sell if S&P downgrades. They would much rather get someone else to rate the crap as AAA, than sell and actually say they were stupid enough to believe S&P in the first place.

SO now the deal is to get a different rating agency approved, but only if S&P changes its model and downgrades the securities. Most of them are already junk – their prices will probably prove it. But we can’t downgrade them, no sir, because, well, because.

The problem is this: Some funds and insurers are forced to buy AAA only. if AAA falls to zero, they can still hold it. If AAA falls by 1% but is downgraded to AA, they have to sell. This is the issue. It’s the regulation that REQUIRES a rating. Get rid of that, and no one will give a flying duck about what S&P thinks.

It’s time really, to make them rating agencies irrelevant.