Legal Commentary

Warning labels?

By Tom Kirkendall

Remember when the various credit-rating agencies contended that their relatively sanguine ratings of Enron's debt up until the company went belly-up were the result of the company's misrepresentations? One of the more ludicrous allegations was that the rating agencies didn't understand the true nature of such relatively common structured finance transactions as derivative pre-pay transactions. Yeah, right.

Fast forward a few years and get a load of this W$J article:

In an acknowledgment that the system it used to rate billions of dollars of mortgage-related securities was potentially flawed, Moody's Corp. said it is considering a new way of rating those and other sometimes-volatile structured finance vehicles.

The credit-rating firm is considering an overhaul of its rating procedures that could include new labels to help investors distinguish collateralized debt obligations and other structured-finance investments from corporate bonds and Treasury securities. . .

More broadly, the ratings firm is trying to decide whether to add warning labels that essentially acknowledge the limitations of its ratings.

Warning labels on highly-volatile structured finance investment vehicles? Barry Ritholtz has some fun with that one.

Full post as published by Houston's Clear Thinkers on February 07, 2008 (boomark / email).