Friday, June 6, 2008

S & P, Moody's and Fitch Agree to Reforms

Moody's Investors Service, Standard & Poor and Fitch Ratings has reached an agreement with New York Attorney General Andrew Cuomo to overhaul the way they collect fees and improve the way mortgage-backed securities are rated within the next six months.

Cuomo says reforms will be aimed at reducing some of Wall Street's power to pit bond-rating firms against each other by shopping for the easiest or highest rating. The bond-rating industry (worth $5 billion a year) has been under scrutiny for its role in giving overly optimistic ratings to sub- prime mortgage bonds in 2006 and 2007.

While Cuomo's deal doesn't entail any fines for the ratings agencies, it does deal with the chronic problem with bond ratings. The ratings agencies are paid by the entities that are being rated. Also, while more than one ratings firm reviews most deals, not all of them always rate the deal and get paid.

Under this new agreement, the agencies would get paid for their review, even if they aren't hired to rate the deal. That way, the rating firms would be less reliant on getting the ratings assignment from bond issuers. Rating firms will also have to disclose the fees they collect in these securities, which could become a blueprint for more disclosure across structured-finance ratings and ratings for corporate and government bonds.

The rating firms will also be required to establish criteria for assessing loan originators and review due-diligence reports on loans that go into the securities so they can better understand what is in the mortgage securities they are rating.

The SEC praises Cuomo's deal and will unveil its own new rules in the coming weeks.

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