Risk & Compliance

Major Reforms Near for Ratings Industry

A settlement is reported close in New York Attorney General Cuomo's probe of the business, while SEC homes in on debt-rating conflicts as well.
Roy HarrisJune 4, 2008

Everybody, it seems, wants to turn the tables on the ratings agencies.

On Tuesday, questions about reforming Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings were high on the agenda for senators questioning three Securities and Exchange Commission nominees. After a discussion about the inequity of the agencies being paid by the very entities they are supposed to be evaluating — the source of many poor judgments about how to rate shaky subprime mortgage companies, among others troubled institutions — the three SEC candidates all said they would “absolutely” engage in serious regulatory efforts once the ratings issue was before them.

On Wednesday, the buzz was that New York Attorney General Andrew Cuomo was close to an agreement that would institute a system forcing additional disclosures on the ratings services, and requiring a new fee structure for them. Those reforms would make the business more independent, it is argued. And in return for signing off on the reforms, the companies would avoid being penalized for any actions that might have made the subprime mortgage mess worse.

As reported by Bloomberg News, Cuomo was close to such a deal that might end his nine-month investigation of the ratings business, which is part of a probe of the entire mortgage industry. The news service said that the deal being pursued would allow the agencies to avoid admitting wrongdoing, and would allow them six months to enact now policies, including the critical fee structure revision.

The Wall Street Journal has described Cuomo’s investigation as having the potential to shake the $5-billion ratings business as severely as probes by the previous AG, Eliot Spitzer, shook Wall Street. Spitzer delved into conflicts of interest between the trading done by Wall Street firms, and the reports of their research analysts.

Bloomberg summarized Cuomo’s ratings probe as examining how the agencies managed to give top grades to subprime-mortgage securities and collateralized debt obligations in the days before their value collapsed. It noted that state law allows him to act against companies and executives through civil lawsuits or criminal charges.

Among the rating-service reforms that already have been made internally, noted the news service, are S&P’s hiring of an ombudsman and the requirement that more disclosures be made. Moody’s, meanwhile, separated its credit-rating and its marketing and analytics operations, while Fitch has begun examining how it grades debt of certain kinds.