The ubiquitous Wall Street analyst hopes to launch a ratings agency, hiring up to 650 analysts at an average salary of $225,000. But what about her methodology?
Meredith Whitney
When Meredith Whitney said last fall that she would build a rating agency to rival the Standard & Poor's/Moody's duopoly, the news was accompanied by few details.
The prominent analyst said her firm, Meredith Whitney Advisory Group, currently provides ratings (on a subscription basis) comparable to those issued by S&P. But she declined to say how many of her employees are dedicated to the task, how many people she planned to hire, or what methodology she uses to rate credit.
Whitney, however, adamantly told the Financial Times that her firm's work is "far more transparent" and "the credibility is far greater" than that of her big, downtown rivals. So she's applying to become a Nationally Recognized Statistical Ratings Organization (NRSRO), that magic designation that makes a firm's opinions the final word on creditworthiness for key players in the Wall Street machine. Pension funds, money market funds, and many big insurers can only buy debt rated "investment grade" by an NRSRO; and bank capital regulation is based on NRSRO credit ratings.
Fortune reviewed a skeletal presentation (see below) Whitney submitted to Securities and Exchange Commission chairman Mary Schapiro -- the outline sheds some light on just what kind of organization she plans to build, and how she's going to attack her large, well-capitalized, and systemically essential competitors.
At this point, Whitney's rating organization is predictably small, with nine analysts looking at financial institutions, six at structured finance, and 12 at public project finance. It's unclear whether that group of 27 researchers is distinct from the team that produces the equity research that generates the bulk of her firm's revenue.
If all goes according to plan, headcount will hit 200 employees in year one (apparently inclusive of sales people) and blossom to 650 in year three. Whitney declined to comment on the document, given that her firm is still in the application phase.
By comparison, S&P and Moody's each have more than 1,200 analysts and analyst supervisors, according to an SEC report issued this January. Given their abysmal performance on structured real estate securities and their tarnished reputations in the aftermath of the financial meltdown, it's safe to say that numbers don't guarantee results.
But you do have to be big to do what Whitney wants to do: compete with the global breadth and depth that Moody's and S&P bring to the table. She says her headcount projection would make her similar in size to the fifth-largest NRSRO, DBRS, but the number of securities rated by DBRS equals about 4% of the total rated by Moody's. One must assume that her employee numbers will continue to grow even after year three. It's also unclear whether Whitney is applying for official approval in Europe or Japan. Without that, her product would be of limited utility to large, global institutions.
Whitney's hagiography as a star analyst is well known, and she is staking her tough and critical reputation on this new venture. When she started her own firm in 2009, she expanded her coverage universe from examining financial firms to looking at consumer credit, housing, and (infamously) municipal bonds. Even so, her equity research is still her bread and butter, and her company coverage does not stray far from banking.
Hopefully her reputation and her compensation packages will attract the sort of top notch talent that can make her firm a player. Jules Kroll is already stealing employees from S&P and Moody's for his start up rating agency, KBR.
Whitney will pay employees $225,000 a year to best Moody's and attract better talent. (Moody's pays $212,000). This makes headcount her largest expense, at $45 million in the first year alone. If the New York Observer is correct and subscriptions to her research begin at $100,000 a year, then she'll have to sell a ton of research reports (and of course, ratings) to stay in the black.
The proposal says her ratings-generated revenue will grow significantly with the passage of the Restore Integrity to Credit Ratings amendment (also known as the Franken amendment), which would allow a government-created board to assign work to NRSROs. While the amendment does seem to have a lot of upside for smaller NRSROs, it's no sure thing. As part of the sweeping financial regulation passed by Congress, creation of such a board was reduced to being part of a study to solve conflicts of interest in ratings. If no better plan is found, then the board will happen. And that's a big if.
When asked to comment on the outlines of Whitney's planned venture, S&P had a tepid response. "We welcome competition because we think the market benefits from a variety of opinions on credit risk," the firm said in a statement. "We believe investors continue to find value in the transparency and comparability of our ratings and the quality of our research, which is produced by more than 1,300 analysts worldwide."
At the end of the day, we know that Whitney has grand ambition, but don't know the most important thing: her rating methodology. That's what will make or break this venture. In order to really compete, she'll have to show that she can bring something more than just reputation to the game. She'll have to compete based on rigorous, transparent analysis that differentiates her diligence and her results.
View this document on Scribd Tags: bond ratings, meredith whitney, moody's, s&p, SEC 0 Comments | Add a Comment Email Print RSS var shared_object = SHARETHIS.addEntry({ title: storyinfo.title, url: storyinfo.earl, summary: storyinfo.summary, icon: storyinfo.icon }); shared_object.attachChicklet("email", document.getElementById("emailIcon")); « Venture capitalists are not your friends BofA's highest paid? Mozilo » cnnad_createAd("792864","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_pagetype=blog&cnn_money_position=628x215_bot&cnn_money_rollup=markets_and_stocks&cnn_money_section=blogs&cnn_money_subsection=quigo¶ms.styles=fs","215","628"); CNNMoney.com Comment Policy: CNNMoney.com encourages you to add a comment to this discussion. You may not post any unlawful, threatening, libelous, defamatory, obscene, pornographic or other material that would violate the law. Please note that CNNMoney.com may edit comments for clarity or to keep out questionable or off-topic material. All comments should be relevant to the post and remain respectful of other authors and commenters. By submitting your comment, you hereby give CNNMoney.com the right, but not the obligation, to post, air, edit, exhibit, telecast, cablecast, webcast, re-use, publish, reproduce, use, license, print, distribute or otherwise use your comment(s) and accompanying personal identifying information via all forms of media now known or hereafter devised, worldwide, in perpetuity. CNNMoney.com Privacy Statement. Katie Benner Katie Benner joined Fortune in October 2006. As a writer for the magazine and the website, she focuses on Wall Street and the economy. Prior to joining Fortune, Benner worked at TheStreet.com, CNNMoney, and as a freelancer in Beijing for China International Business, the South China Morning Post, and as a columnist for Beijing Review. She has a B.A. in English from Bowdoin College. Email This Author cnnad_renderAd("http://ads.cnn.com/js.ng/site=cnn_money&cnn_money_brand=fortune&cnn_money_pagetype=blog&cnn_money_position=336x600_rgt&cnn_money_rollup=markets_and_stocks&cnn_money_section=blogs"); RecentPosts RecentComments Bernanke points finger on food prices The flip side of the pension crisis BofA's highest paid? Mozilo Inside Meredith Whitney's ratings agency Venture capitalists are not your friends Well maybe someone can explain to me h... More Why the complaints? You may take your... More Wow! These gentlemen are amazing. The ... More Shareholders are far from being served... More "Risk managers like me wouldn't be per... More #termSheetTout {font:normal 12px/22px Arial;padding:10px;} #termSheetTout img {margin-bottom:10px;} Receive Fortune's newsletter on all the deals that matter, from Wall Street to Sand Hill Road. Written by Dan Primack and emailed every day and as news happens. Sign up now! Contributors ColinBarr Bernanke points finger on food prices Street Sweep DanPrimack Blackstone's blowout quarter, and where it's investing next Term Sheet KatieBenner Inside Meredith Whitney's ratings agency ScottCendrowski The big hubbub over St. Joe Company DuffMcDonald A tale of two (insider?) traders Hedgeye How inflation is turning breakfast into a luxury item AllanSloan Losers are winners in Uncle Sam's bailout binge Nin-HaiTseng The flip side of the pension crisis ShawnTully Don't believe the rosy forecasts BeckyQuick America's secret commodities crunch Markets MarketMovers USIndices Company Price Change % Change Citigroup Inc 4.80 -0.05 -1.13% Ford Motor Co 15.53 0.13 0.84% Bank of America Corp... 14.30 0.06 0.42% Pfizer Inc 19.07 0.11 0.58% Cisco Systems Inc 21.81 0.19 0.88% Data as of 2:15pm ET Index Last Change % Change Dow 12,041.29 -0.68 -0.01% Nasdaq 2,748.50 -1.06 -0.04% S&P 500 1,303.48 -0.55 -0.04% Treasuries 3.54 0.05 1.38% Data as of 2:30pm ET Sponsored by cnnad_createAdNoTileId("177939","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_brand=fortune&cnn_money_position=88x31_spon&cnn_money_rollup=homepage&cnn_money_section=fortune&cnn_money_subsection=marketgraph¶ms.styles=fs","31","88"); cnnad_createAd("571998","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_pagetype=blog&cnn_money_position=336x280_quigo&cnn_money_rollup=markets_and_stocks&cnn_money_section=blogs&cnn_money_subsection=quigo¶ms.styles=fs","280","336"); Most Popular MostRead MostCommented Editor'sPicks Verizon iPhone: The reviews are in More The rise of the button-down car salesman More Ready for 100-year Treasury bonds? More Cows for Kazakhstan More How inflation is turning breakfast into... More BofA's highest paid? Mozilo More Drug use at work: Higher than we thought More FedEx CEO: Let's end our need for oil More For the New Year, reading the Hang Seng's... More Egypt and the growing problem of global... More Verizon iPhone: The reviews are in More When law school is worth the cost More Why cattle markets are having a cow More How inflation is turning breakfast into a luxury item More Why companies need to start hiring older workers More EBay CEO Donahoe bares his own work-life struggles More Will Murdoch's Daily ever break even? More Murdoch's The Daily hits iPads today More A CEO at Davos asks: Is Davos worth it? More Online MBAs heading to the ivory tower More Egypt uprising: An ex-CIA official's... MoreVenture capitalists are not your friends MoreInside Meredith Whitney's ratings agency MoreDrug use at work: Higher than we thought MoreBlackstone's blowout quarter, and where... MoreYes, 80% of our electricity can be... MoreFor the New Year, reading the Hang Seng... MoreThe rise of the button-down car salesman MoreReady for 100-year Treasury bonds... MoreGoogle opens Android Market web store More var MPlinkSet0 = new Array(); var MPlinkSet1 = new Array(); var MPlinkSet2 = new Array(); MPlinkSet0 = document.getElementById("mostPop0").getElementsByTagName("a"); MPlinkSet1 = document.getElementById("mostPop1").getElementsByTagName("a"); MPlinkSet2 = document.getElementById("mostPop2").getElementsByTagName("a"); for (i=0;i Home | Contact Us | Advertise with Us | Corrections | Career Opportunities | Site Map RSS | Email Delivery | Portfolio | Podcasts | Mobile | Widgets | User Preferences | Special Sections chooseFortEKeyFooter(); | Magazine Customer Service | Download Fortune Lists | Reprints | Conferences | Business Leader Council © 2011 Cable News Network. A Time Warner Company ALL RIGHTS RESERVED. Terms under which this service is provided to you. Privacy Policy. Advertising Practices. Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2011 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2011 is proprietary to Dow Jones & Company, Inc Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2011. All rights reserved. Most stock quote data provided by BATS. var R = new String(document.referrer); var serveAd=1; if(R.length > 0) { if (R.indexOf("yahoo.com") >= 0) serveAd=0; } if(serveAd) { // dynamic logic document.write(''); //ADSPACE: ros/popunders/bot.1x1 cnnad_createAd("229469","http://ads.cnn.com/html.ng/site=cnn_money&cnn_money_position=1x1_bot¶ms.styles=fs","1","1"); try { selectSurvey(); } catch(e){} } _qoptions = {qacct:"p-5dyPa639IrgIw"}; document.write( ''); _qoptions={qacct:"p-5dyPa639IrgIw",labels:"Fortune"}; document.write(unescape("%3Cscript src='" + (document.location.protocol == "https:" ? "https://sb" : "http://b") + ".scorecardresearch.com/beacon.js' %3E%3C/script%3E")); COMSCORE.beacon({ c1:2, c2:6035728, c3:"", c4:"", c5:"", c6:"", c15:"" }); jQuery(document).ready(function(){ // set up horizontal scroll setupFeaturedBoxes(); }); getFeedData(); //for clickability changeLinkTargets( document.getElementsByTagName("body").item(0),'new' ); //check for or create a namespace if (typeof CNN === 'undefined') { var CNN = {}; } if (typeof CNN.tracking === 'undefined') { CNN.tracking = {} } /** Adds an image ping beacon to the end of the HTML page. */ CNN.tracking.cnn_wpBlogPing = function() { var loc = window.location.href; var img = ''; $('body').append(img); }; $(document).ready(function() { CNN.tracking.cnn_wpBlogPing(); }); initializeHTML5Video(); try{ msQueueManager.init('requestFrame', ms_blankURL); }catch(e){} Please create a screen name to access this feature.Screen name (Select one with 3-12 characters; Numbers and letters only)
Forgot passwordEnter your e-mail address below and we will send you an e-mail with a link and code to reset your password.
Already have the reset code?
Password selectionReset code
New password
Log in & let's get started!Password
Forgot password?
Remember me for two weeksNot a member yet?
Sign up now for a free account Sign up or log inScreen name
Select one with 3-12 characters;Numbers and letters onlyPassword
Make it 6-10 characters, no spacesType what you see in the grey box
If you can't read this, try another one. Yes, I would like to receive occasional CNNMoney member updates about new features and special offers.CNNMoney will use the information you submit in a manner consistent with our Privacy Policy. By clicking on "sign up" you agree with CNNMoney's Terms of Service and Privacy Policy and consent to the collection, storage and use of this information in the U.S. subject to U.S. laws and regulations. (learn more)
We're Sorry!This service is temporarily unavailable. Please try again soon.
Thanks!
Please check your e-mail and click the link to confirm your membership. Then, you'll be ready to participate in all activities and conversations on our site.
Go to your Profile page
Newsletters Breaking Financial NewsBe the first to know when there is breaking financial news with timely alerts delivered straight to your inbox.
Send to: Apple 2.0Fortune's Philip Elmer-DeWitt brings you Mac news from outside the reality distortion field.
Send to: Ask AnnieFortune columnist Anne Fisher answers your career-related questions.
Send to: Ask the ExpertMoney Magazine's Walter Updegrave answers readers' toughest financial questions.
Send to: Captain's BlogFortune managing editor Andy Serwer keeps tabs on Wall Street
Send to: The Help DeskCNN's Gerri Willis gives tips and tools for saving more and spending wisely.
Send to: Market BriefingA complete roundup of each day's trading activity.
Send to: PostcardsFortune editor at large Pattie Sellers shares fascinating, fun and valuable insights into people who sit at the pinnacle of power.
Send to: Today in TechThe companies, deals, and trends in tech that are moving market and making headlines.
Send to: changeLinkTargets( document.getElementsByTagName("body").item(0),'new' ); Read Full Article »