Credit rating agencies default statistics

[Cate Long]

As many of you know the SEC last August required that registered
credit rating agencies expose their ratings data in a format that
market participants, academics and regulators can drill down to the
security level to gauge historical ratings accuracy.

As part of my work for Congress I've been documenting and studying the
agencies default reporting and thought it might interest some of you.

Here is how Fitch describes the requirement:

"Fitch Ratings is disclosing its entire ratings history pursuant to an
SEC requirement that each NRSRO disclose ratings history information
for 100% of its credit ratings initially determined on or after June
26, 2007, with each ratings action to be disclosed no later than
twelve months or twenty-four months after it is taken, depending on
whether the rating is issuer-paid.

Any ratings action information required under the 100% disclosure
requirement with respect to issuer-paid credit ratings need not be
made public less than twelve months from the date such ratings action
is taken.

A ratings action on a rating that is not issuer-paid need not be made
public less than twenty-four months from the date it is taken.

The Commission believes that ratings history information for
outstanding credit ratings is the most direct means of comparing the
performance of two or more NRSROs. The file containing the complete
ratings history disclosure can be found as a hyperlink on the left
side of this screen.

Moodys > > > http://v3.moodys.com/Pages/reg001004.aspx

S&P > > > http://www.standardandpoors.com/prot/ratings/history-samples/en/us

Fitch > > > http://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=3&detail=4

You will likely have to free register for the raters sites.

I'd be curious if anyone runs analysis what kind of trends they are
seeing.

Many thanks! Cate

[Cate Long]

It’s Time for an Independent Audit of Rating Agency Corporate Bond
Rating Performance (Update 2)

7/22/2009 12:42 AM

The U.S. Treasury proposed new regulations on the major rating
agencies yesterday, and a chorus of critics have attacked the agencies
for inaccuracy of both structured products and corporate ratings over
the last two years. One of my great fears has been the moral hazard
that the rating agencies have to exaggerate the accuracy of their
historical performance in rating corporate bonds. Today, those fears
were realized. The U.S. Treasury should require an independent audit
of rating agency performance in rating bonds and structured products.
This post explains why.

The other day I received an e-mail from a former senior executive at
Standard & Poor’s Corporation that included as an attachment an S&P
study entitled “Annual 2008 Asia Corporate Default Study and Ratings
Transitions, “ dated April 2009. A copy of the report is available
here:

http://www2.standardandpoors.com/spf/pdf/fixedincome/Default_Study-Asian.pdf

One of the key credit modeling issues that my colleagues and I are
dealing with currently is the parsing of government rescues into two
groups of institutions, those who are deemed a “fail” for credit
modeling purposes and those who are deemed a “not fail.” With this in
mind, I turned to the S&P study for evidence that they too had taken
the names that our client consensus has as “fails.” These include
government rescues where the common shareholders have been
disenfranchised and the government has effective control of the
organization. Many names come to mind, but the clients we deal with
are most animated when it comes to institutions like AIG, FNMA, and
FHLMC. FNMA and FHLMC were rated AAA/Aaa even on September 7, 2008,
the day that they were put into conservatorship by the U.S.
government. AIG had been rated AAA less than four years before that
firm too was effectively taken over by the U.S. government. Robert
Jarrow and I argued in our March 16, 2009 blog post on www.kamakuraco.com
that the errors in corporate ratings were so severe that this era is
essentially a “ratings Chernobyl” that would taint the accuracy of
agency ratings for the next few decades. For a copy of that article,
see the following link to www.riskcenter.com:

http://www.riskcenter.com/story.php?id=17976

With that in mind, I turned to the S&P study to see how serious the
ratings accuracy damage was for the report through 2008. It turned
out that Robert Jarrow and I were wrong—Standard & Poor’s just ignored
its own errors so there was no “Ratings Chernobyl.” Table 15 in the
S&P report is entitled “Comparison of Corporate Cumulative Average
Default Rates” for both Asia and global corporates for the period
1981-2008. The one year default rate for global corporates rated AAA
was ZERO! So was the two year cumulative default rate. The third year
cumulative default rate was given as 0.09% and the fourth year
cumulative default rate was 0.18%, so we guess that the third year
reflects one default, the second year reflects 2 defaults and the
implied number of AAA company years was 1/0.0018, or 556 “company
years” of observations. What happened to FNMA and FHLMC? They’ve
vanished from the data base! They didn’t fail!

http://www.kamakuraco.com/Company/ExecutiveProfiles/DonaldRvanDeventerPhD/KamakuraBlog/tabid/231/EntryId/94/It-s-Time-for-an-Independent-Audit-of-Rating-Agency-Corporate-Bond-Rating-Performance-Update-2.aspx

> Fitch > > >http://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?con...