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Rating Agencies Walk a Tightrope

NEW YORK CITY-Agencies must strike a balance between rebuilding investor confidence and not squelching the return of liquidity, says Deloitte's Korologos.

By Paul Bubny | Updated on October 12, 2009

NEW YORK CITY-Amid multiple challenges, including the prospect of incrased regulatory oversight, rating agencies are walking a tightrope as they strive to rebuild investor confidence while not veering too far toward caution, Deloitte’s Tino Korologos tells GlobeSt.com. Rate deals too liberally, and investors perceive that the agencies haven’t learned from past excesses; rate them too cautiously, and it stymies a return of liquidity.

“The agencies are facing a double-edged sword right now,” says Korologos, managing director with Deloitte’s real estate consulting practice. “On the one hand, they have to rebuild credibility. In doing that, they have to let the market participants know that ‘we’re going to do the right job for you. Part of the problem in the past was that we faced this 500-year flood where everything went south very fast, well beyond what we thought was going to be the case. Our ratings didn’t capture that. So we’re going to be more conservative now.’ “

On the other hand, he says, “We have to create liquidity in the marketplace. Of the $3.5 trillion commercial real estate loan market, about a quarter of that is CMBS and about half is commercial banks. So you’re talking about $800 billion that really has no replacement liquidity right now.”

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