Fed Plan Puts Rating Agencies in a Bigger Bind
Oxford Analytica has an interesting take on how the Federal Reserve’s $200 billion liquidity injection puts the embattled credit rating agencies in an even bigger bind.
“The latest Fed action is based on the AAA rating of collateral eligible to receive Fed financing: it will not accept mortgage-backed securities that credit rating agencies (CRAs) have put under review for possible downgrades. This raises again the key role of CRAs, on which the market has long relied for guidance on the credit standing of investments,” OxAn says in Credit rating agencies draw fire.
“The subject has become very political, as banks have put pressure on CRAs not to downgrade monoline bond insurers,” OxAn says.
Now the Fed action enormously increases pressure on them not to downgrade a wide range of AAA mortgage bonds.
“With no initiative in sight to reform the system quickly, the danger to the financial system is that CRAs act conservatively, downgrading securities to limit their own liability. This could lead to a cascade of losses.”
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