NEW YORK (MarketWatch) -- In the latest salvo in a now highly public war of words, ratings agency Fitch said it will continue to rate MBIA Inc.'s subsidiaries without charge, despite the bond insurer's request that it stop.
The increasingly confrontational dialogue was initiated on Friday when MBIA asked Fitch in a letter to stop providing some ratings on the firm. That letter, released to the public, also asked Fitch to return or destroy data MBIA had provided to Fitch.
MBIA Chief Executive Jay Brown defended the firm's decision and said the company has started to generate new business.
In response, Fitch CEO Stephen Joynt said the agency plans to keep rating the bond insurer and questioned the company's reasons for trying to end their relationship.
"It seems disingenuous at best to assert in your letter to investors published yesterday, March 9, that you 'intend to work with Fitch to perform the analysis needed to rate MBIA's debt securities,' while privately demanding return of the portfolio information and materials that you freely provided to support our ratings and that of other rating agencies for many years," Joynt wrote.
MBIA shares fell 10% to $10.77 on Monday, leaving them down 29% so far this year.
Fitch's decision to keep rating MBIA is a positive development, according to Joseph Mason, associate professor of finance and LeBow Research Fellow, at Drexel University's LeBow College of Business.
"This is the kind of market discipline we need to get back to," Mason said. "Before the 1970s, there was a very prevalent traditional of unsolicited ratings. This kept the agencies that get paid to do the ratings in line."
Most ratings agencies are paid by the companies they analyze. That's created the perception of a conflict of interest because agencies may be less inclined to come out with lower ratings because they don't want to upset the firms that pay them.
If more agencies rated companies without being paid by them, this potential conflict could be reduced.
"Unsolicited ratings allow agencies to demonstrate their abilities, even when they don't have any monetary interest in the outcome," Mason said. "Any bias gets washed out of the system pretty quickly. Right now that bias is in the system."
Ratings agencies also get confidential information from companies to help them produce more accurate ratings. But when companies restrict information to some agencies, as MBIA is doing with Fitch, the system may become even more skewed.
One way around that is to introduce rules that require equivalent disclosure. When a company provides information to one rating agency, it has to give that to all other regulated agencies too -- probably via some sort of database, Mason explained.
MBIA's request that Fitch destroy information suggests the company is very keen to stop the agency from rating it in future, Mason said.
"It's expected that this information would remain confidential, but to ask that it be destroyed is really going the extra mile to stop Fitch rating them on an unsolicited basis," Mason said.
"This betrays the bias that's currently in the system," he added. "MBIA is saying that because you're not financially tied to us anymore, we really don't want you rating us."
Sean Egan, president of Egan-Jones Ratings, an agency that's paid by investors rather than issuers, goes further, arguing that any confidential information given to ratings agencies should be disclosed to all investors.
MBIA doesn't provide Egan-Jones with the information it requests "because we're bearish on them," he noted.
MBIA spokesman Jim McCarthy said Egan-Jones has never asked the bond insurer for any information.
Egan responded later on Monday that Egan-Jones has asked MBIA for information and will incorporate any new data into its assessment of the bond insurer. The agency encourages companies to disclose that information to the rest of the market too, he said.
"No firm should have preferential access to information. It should be available to everyone in the market," Egan said. "There's no reason why rating firms should be treated differently than other market participants."
"This whole controversy highlights the problems that exist with the industry structure, whereby a company can silence a rating firm if that company doesn't like the rating that's being generated," Egan said.
MBIA CEO sees $200 million in losses coming
MBIA said Monday that it expects $200 million in mark-to-market losses from its credit-derivative business and said Fitch's insurer-financial-strength ratings, or IFS, can cause "serious volatility" in how the Armonk, N.Y.-based company is viewed in the equity markets.
Brown said it was an appropriate time to ask the credit-rating agency to no longer provide its IFS ratings. He added that he had, "very little idea why Fitch's capital model produces the charges it does, and why it can change so rapidly at any point in time when there is no obvious change in our circumstance or in the credit market at large."
Shares of bond insurers such as MBIA and Ambac Financial Group have plunged of late as investors question their ability to survive the credit crunch and maintain their all-important AAA credit ratings. The companies wrote policies insuring billions of dollars of collateralized debt obligations and other mortgage-related debt that could go into default.
In order to rating a company properly, agencies need as much information as possible. They get confidential information about companies, but agree not to divulge that to the market.
However, some agencies get more information than others, Mason explained.
"One of the main constraints to this practice of unsolicited ratings is the lack of information given to some agencies," he said. "MBIA's request that information be destroyed by Fitch is an example of this."
"The good news is that we are starting to write some business in the new issue market," Brown wrote in the shareholder letter, dated March 9.
The CEO, however, acknowledged MBIA has made missteps.
"Make no mistake about it, we wrote some business that in hindsight we wish we hadn't, and those decisions have certainly had an impact on the market's confidence in MBIA," Brown wrote. He was addressing the wide spread on credit default swap contracts written by MBIA, despite the recent AAA ratings affirmations by Moody's and S&P.
"Given our robust financial position at MBIA Inc., I would certainly argue that the existing spread in the short term is illogical," the CEO said.
Among other possibilities, Brown said the spread could be the result of MBIA "being used as a ping-pong ball in a high stakes games by the big guys." Hedge funds and other traders have made money shorting shares of MBIA and other bond insurers that have suffered as a result of the credit-market turmoil.
Brown pointed out the company doesn't have any principal payments pending on its debt until 2010. He said it's "highly improbable" MBIA will default over the next year.
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