Credit Rating Agencies Get An Overhaul
Thursday, June 05, 2008SUSIE GHARIB: A major overhaul today of the way the country's three top credit ratings agencies do business. New York State reached a deal with Standard & Poor's and Moody's Investors Service and Fitch Ratings to reform how they charge for reviewing mortgage-backed securities. The agreement lets the ratings companies avoid sanctions in New York for their alleged role in the sub-prime mortgage crisis. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: New York State's Attorney General Andrew Cuomo stood with executives from Wall Street's three main credit rating agencies, announcing changes to the way those firms review residential mortgage-backed securities.
ANDREW CUOMO, NEW YORK STATE ATTORNEY GENERAL: The agreement, I believe, is a major, dramatic reform of the marketplace. I think it's a very positive step. It addresses the issues that we found as systemic flaws in the process.
MILLER: One systemic flaw was the way Standard & Poors, Moody's and Fitch got paid for evaluating certain investments that are backed by risky mortgage debt. Until now, they were usually reviewed by several agencies, but only one firm got selected and paid for the service. That created an incentive for favorable ratings. Now, the agencies will get paid for the work they do, even if they're not ultimately selected to rate the security. Credit ratings agencies will also disclose which securities were submitted for their review.
CUOMO: We wanted to end the shopping of ratings, which is an investment bank could go to one rating agency. I they didn't like the way the process was going, they could go to a different rating agency.
MILLER: But some critics say today's agreement does not go far enough, because it does not address fundamental conflicts of interest. Sean Egan, head of Egan-Jones Ratings Agency, which makes its money from investors who subscribe to its service, told NIGHTLY BUSINESS REPORT quote, Moody's, S&P and Fitch are paid by the issuers of the securities they are rating and the settlement does nothing more than rearrange the manner and means whereby these payments are made, end quote. Today's deal only applies to securities backed by non-prime loans. But S&P President Deven Sharma believes it will lift investor confidence.
DEVEN SHARMA, PRESIDENT, STANDARD & POOR'S: We continue to believe that the more our customers, investors and other market participants know about how we do our work, the better.
MILLER: Wall Street strategist Jim Awad say today's pact kicked off a relief rally.
JAMES AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: The stocks are up because there were no financial penalties, no major legislated or regulated change in the business model, in the profitability.
MILLER: However, the ratings agencies are still in the hot seat with the Securities and Exchange Commission, which is discussing its own set of new rules. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
