SEC Proposing New Rules for Credit Raters
By MARCY GORDON (AP Business Writer)
June 11, 2008 (Associated Press) WASHINGTON - Federal regulators are proposing new rules to stem conflicts of interest and enhance disclosure for Wall Street's credit rating industry, a major financial player that has been widely criticized for failing to identify risks in subprime mortgage investments.
Amid the turmoil that has gripped the financial markets in recent months, the big credit rating agencies have downgraded thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments has plummeted. The downgrades by the three firms that dominate the $5 billion rating industry - Standard & Poor's, Moody's Investors Service and Fitch Ratings - have contributed to hundreds of billions in losses and writedowns at major banks and investment firms.
The Securities and Exchange Commission is scheduled to vote Wednesday at a public meeting to propose rules intended to eliminate conflicts of interest between the agencies and the investment banks that pay them to rate the securities they issue. Among other things, one proposal would ban the rating agencies from advising the investment banks on how to package securities to secure favorable ratings.
"The goals of the reforms are to promote ratings with integrity and curb questionable practices that have contributed to the credit market turmoil," SEC spokesman John Nester said Tuesday.
In addition, the proposed rules are expected to require more detailed disclosures by the rating agencies, such as the risks and other factors that go into establishing a rating.
They also may require a new designation for ratings of complex securities, such as those underpinned by mortgages or student loans, but that idea is fiercely opposed by mortgage banking interests, Realtors, rating agencies and investment banks.
The American Securitization Forum, the group representing Wall Street institutions that transform mortgages and other debt into bonds that are traded, told the SEC in a May 21 letter that such a change "would be cosmetic rather than substantive, and would not convey any meaningful additional information about credit ratings."
New York Attorney General Andrew Cuomo on Thursday announced an agreement with the three main rating agencies that would overhaul how they evaluate investments backed by risky mortgage debt. Cuomo's office has been investigating how mortgage-backed securities carried high credit ratings yet still collapsed during the subprime mortgage crisis.
The agreement applies to riskier, "non-prime" debt issued in the U.S. and is meant to end what the industry calls "ratings shopping" that pits rating agencies against one another.
Investment banks looking to issue mortgage-backed bonds previously went to all three agencies for a review, but banks would only use, and pay for, the most optimistic rating. Under the agreement, the agencies will get paid regardless if they are hired to assign a rating.
The three rating agencies say they are cooperating with the SEC to improve the quality of their analyses.
The SEC proposal will be opened to a public comment period of several months and could be formally adopted by the agency after that.