When discussing who to blame for the financial crisis, usually the rating agencies are one of the parties that come up. Their failure to accurately depict the risk in mortgage securities led investors to believe they were safe. This exacerbated the real estate bubble and the losses that followed. The summer's financial regulation bill had some minor reforms seeking to improve the potential conflict-of-interest that could lead the rating agencies to provide too favorable ratings. One sought to pave the way for raters to provide analyses on securities that they were not hired to evaluate. Such unsolicited ratings may soon begin to surface, but will this new product succeed?
Tracy Alloway at the Financial Times Alphaville blog notes that Realpoint is looking to get into the unsolicited ratings business. Alloway quotes an article at Total Securitization which explains that the company intends to offer ratings and analysis on a fee basis to investors. She hopes that this new trend will really take hold. I do too, but this isn't an easy business model to make work.
Will It Be Profitable?
For starters, it takes significant manpower to evaluate asset-backed securities. And these particular quant guys don't come cheap: they're highly valued on Wall Street. Traditionally, the smartest of the bunch who start off at rating agencies eventually end up at investment banks and hedge funds, which offer better pay. To keep high quality individuals, the agencies have to competitively pay these analysts, something that they have trouble doing even when they are promised fees for solicited ratings.