The flip side of the ratings controversy is that some investors have relied blindly on them. “At the height of the market, in some cases, investors carried out no due diligence,” says Conor Downey of law firm Paul Hastings. “They couldn’t – they had committed to buy before the paper was produced.” But by 2011, European Union investors will have to show that they have carried out a basic level of due diligence on any CMBS they buy. This is enshrined in Article 122a of the EU’s Capital Requirements Directive, which regulates EU banks. “These requirements apply to credit institutions – largely deposit-taking banks, building societies and similar firms,” says Gerard Breen of the Financial Services Authority.
“Investors must look at a range of factors, including the structure, quality of collateral, its valuation and the reputation and loss experience of deals by the same originator, and record this for future reference.” The Committee of European Banking Supervisors (CEBS) is drawing up detailed guidance and national regulators will then produce their versions of the legislation. “As a starting point, these obligations are a minimum of what investors should do before choosing to invest,” says Breen.
Reto Bachmann, head of ABS research at Barclays Capital, says this regime “blames the victim”. Investors may not have enough information to do the job properly, but face severe penalties if negligent; yet originators’ requirement to provide the data investors need is couched in vague terms. Graham Page, head of credit at RZB Bank in London, concurs: “Almost all the requirements are on investors. You have to dig down to criteria, but if these are not disclosed, there is little you can do other than not buy.”