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Importantly, it also would force them to publish preliminary ratings so that investment banks no longer could sit on one rating while shopping for a better one from competitors.
However, there's no explicit requirement to provide detailed cash flow and default assumptions in a ratings agency's model, an important part of what went wrong in the mortgage finance debacle. Investment banks disclosed one set of assumptions about how a security would perform, while ratings agencies focused solely on default assumptions, effectively comparing apples to oranges.
Several whistleblowers told McClatchy that this was how Moody's mashed the numbers to arrive at the favorable ratings needed to get or maintain business from investment banks such as now-defunct Lehman Brothers and Bear Stearns.
"The agencies haven't always wanted to make their models public; it is proprietary information. However, since ratings are somewhat like a 'public good,' I believe this information should be available" to investors, the former analyst said.
Had the information been public, he said, investors would've known that Moody's didn't work off a loss model but only tweaked its basic assumptions to reflect the possibility of greater losses with little quantitative analysis or historical performance studies.
"If Moody's was forced to make all of their analysis public, people would have realized much earlier that the emperor was wearing no clothes," the former analyst said.
ON THE WEB
2008 SEC report on credit-rating agencies
History of rating agencies and institutional investors' view of rating agency overhaul
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