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The papers are full of stories about how Congress and the regulators are going to take Standard & Poor’s and the other big ratings houses down a notch in the wake of the subprime crisis and S&P’s downgrade of Treasury debt.

Don’t bet on it. I spoke to some of their smaller competitors this week to gauge the health of the ratings industry. To hear them tell it, business for the big boys is good and probably getting better. Here’s why: The Dodd-Frank financial reform act was thought by many to reduce the influence of ratings houses by deleting references to them in the federal laws governing bank and pension investments. But as regulators plod through the mammoth task of coming up with the rules to implement Dodd-Frank, competitors say the big ratings houses are successfully protecting some of their most valuable advantages.

Such as: Rating derivatives like collateralized loan obligations, which contain a murky and constantly changing collection of bank loans. While the Securities and Exchange Commission has proposed new rules that would require ratings houses (or Nationally Recognized Statistical Rating Organizations as they are called) to submit more documentation of how they arrive at their conclusions, it wouldn’t require them to reveal all of the data, in real time, on the derivatives they monitor.

Underwriters and ratings houses both understandably resist the release of such data, which they consider proprietary. Brokerage firms and analysts also resisted Regulation FD in the 1990s, which required companies to release market-moving information simultaneously to everyone. They lost and stocks no longer mysteriously gyrate during closed meetings between company executives and sell-side analysts.

"Wall Street thrives on inefficient pricing and a wide bid-offer spread," said Glenn Reynolds, chief executive of CreditSights, which sells fundamental analysis on companies and debt securities to institutional investors. "One of the ways you keep it inefficient is by keeping the data behind walls."

S&P, Moody’s and Fitch all maintain terabytes of data about the securities they rate, which they can slice and dice into even more lucrative products such as analytical tools for investment managers to monitor risk.  The big ratings houses "have tried for years to overhaul their businesses and get into data analytics," said Reynolds, who competes in some of the same markets. "The more captive, proprietary data you get by dint of being a ratings company, the more you can turn it into another data stream."

It’s this opportunity that might explain the 5.2% stake in Standard & Poor’s parent McGraw-Hill recently assembled by Jana Partners and the Ontario Teachers’ Pension Plan. Jana has discussed splitting up the company, possibly jettisoning its lagging education unit, to unlock the $55-a-share value Lazard and others have identified at McGraw Hill. In its most recent earnings call, the company noted that its newly created McGraw Hill Financial unit racked up first-half revenue growth of 15% with a 30% operating margin. The company predicted margin improvements in its structured-finance business.

James Gellert of Rapid Ratings, another small competitor in the debt-rating business, said there are a number of details in Dodd-Frank and previous laws that together help to maintain the dominance of the big ratings houses. For example a 2006 law required firms to have three years’ experience with a particular product before applying for NRSRO status. Now there are a handful of competitors including A..M. Best, Kroll, Egan-Jones and Japan Credit Rating Agency. But through the thick of the subprime crisis, when the Big Three were slapping triple-A ratings on paper that often turned to junk, the rules "completely protected their business," Gellert said. Data from those years is still largely unavailable to new competitors, he said.

The rules adopted and being considered by the SEC focus on changing the behavior of the ratings houses, without changing the underlying market for the data that drive securities prices. SEC-licensed NRSROs will have to supply information on how they rate securities, who does the rating and whether they subsequently take a job with a securities underwriter, for example. They won’t have to share the underlying data they use to change a rating, however, which investors and rival analysts could use to determine more than just the default risk on a security.

Neither Gellert nor Reynolds is interested in transforming his firm into an NRSRO, citing the high costs of compliance with the many new rules. Reynolds would love to issue reports on the collateralized loan market, for example, which was $100 billion a year before the crash and is expected to rise to $10 billion in issuances this year.

Getting information about the loans backing an illiquid, thinly traded tranche of a CLO now is nearly impossible, Reynolds said, since only the underwriters, trustees and ratings firms have the underlying data and frequently they have signed non-disclosure agreements. "It’s not illegal to share it, you just can’t get it," Reynolds said. "We’ve tried."

The SEC has launched into the commendable task of removing references to bond ratings from the laws governing banks and professional investors. One core problem with the old system was managers could pull down a few hundred thousand a year for the job of identifying ‘AAA’ on a security; now they have to do their own due diligence, too. But as Reynolds and Gellert point out, the most important reform would be requiring underwriters to make public all the data on the corporate loans, mortgages, real estate and other assets behind the securities they sell, so that any analyst — not just an SEC-certified ratings firm — can make an informed decision about their value.

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