By Steven K. Beckner

ATLANTA (MNI) – A pair of Federal Reserve Bank presidents Tuesday
expressed concern about the role that U.S. credit rating agencies played
in foisting triple-A rated asset backed securities and other structured
products on the world.

Atlanta Fed President Dennis Lockhart recalled that, in recent
years, the economies of countries as remote as Kazakstan suffered after
they invested in AAA-rated securities backed by subprime mortgages that
lost most of their value.

“Do we have an issue of creating triple A to satisfy an
international market for U.S. securitized instruments?” asked Lockhart,
who had risen to speak at a session of an Atlanta Fed conference.

Philadelphia Fed President Charles Plosser, moderating a panel at
the conference, said, “The demand for triple-A ratings in some cases is
artificial — aritifical by security rules and regulations about what
certain types of entities can and cannot hold.”

“And so you create this demand … where particular companies …
have some sense of monopoly-like power,” he added.

The Securities and Exchange Commission long ago mandated that
securities be rated by the major rating agencies, giving those private
agencies an official imprimatur.

New York Federal Reserve Bank Vice President Adam Ashcraft said the
government sponsored enterprises “had triple A tranches tailored
specifically for them, but outside of that example.”

Before he could finished, Plosser interjected, “That would be a
pretty big one.”

Ashcraft said it would be quite some time before the market for ABS
and structured products based on ABS will revive.

He said there is not enough volume of asset backed securities on
which to base collateralized debt obligations (CDOs).

“ABS has rebounded, but it’s nowhere near the peak,” he said,
adding that at least $100 billion worth of ABS is needed to securitize
again into ABS CDOs of different tranches.

“We’re years away from generating that kind of volume … to offer
that kind of product,” said Ashcraft.

Despite ABS problems, Ashcraft argued that loan securitization is a
good thing and needs to be revived. “Having all credit generated on
banks’ balance sheets is not an ideal world,” he said.

“Securitization can increase availabiltiy of credit and reduce
financial sector volatility,” he said, adding that ABS can “diversify
issuer funding sources” and allow for better asset-liability duration
mismatches than funding with deposits, among other benefits.

“Don’t want to throw the baby out with the bath water,” said
Ashcraft.

Ashcraft said the ABS market can be improved, potentially, by
strengthening the credibility of credit rating agencies. Among his
suggestions were third party choice of agency; disclosure of all
communication between the ABS issuer and the rating agencies and
“deferred and/or subordinated compensation.”

** Market News International **

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