(Adds Standard & Poor's comments in the eighth
paragraph.)
DOW JONES NEWSWIRES
Connecticut Attorney General Richard Blumenthal said Monday he
is investigating why a Federal Reserve Board bailout program will
steer up to $400 million to the three largest credit-rating
agencies, saying the firms' poor performance in recent months
helped cause the financial crisis.
The firms, Standard & Poor's Ratings Services, Moody's
Investors Service and Fitch Ratings, have been widely criticized
for their role in fueling the financial crisis with overly rosy
debt ratings.
The three firms dominate the credit-ratings business and their
ratings are considered crucial for investors who buy bonds and
asset-backed securities. They have been vilified in recent months
because their ratings on mortgages securities were viewed as widely
off base.
Blumenthal on Monday wrote to Federal Reserve Chairman Ben
Bernanke asking him to revise the program to stop giving the three
agencies an advantage and assure that seven smaller competitors can
compete for their work.
The Federal Reserve's rules for its $1 trillion Term
Asset-Backed Securities Loan Facility, or TALF, which is intended
to restart consumer lending, require financial institutions to have
new securities rated by two or more "nationally recognized
statistical ratings agencies." Only the largest three credit-rating
firms meet those criteria.
"This potential $400 million windfall overpays the Big Three
raters and undercuts competitors - another money reward for
failure," Blumenthal said. "The Federal Reserve is rewarding the
same companies who helped burn down the house, in effect steering
them cash to rebuild what they destroyed."
Fitch said it disagreed with Blumenthal's view the rating
agencies exerted influence on the Federal Reserve in its
determination of TALF rule. It asserted the rules for the
government programs to promote stability were "determined by the
government agencies themselves - not by rating agencies." Fitch
said it has implemented a wide range of policy and procedural
initiatives to "enhance the reliability and transparency of our
ratings progress."
S&P spokesman Ed Sweeney, meanwhile, touted S&P's track
record in rating consumer asset-backed securities and said the
investigation was "without merit." Sweeney added S&P strongly
supported increased competition from other credit ratings
firms.
A spokesman with Moody's declined immediate comment. The Fed
hasn't responded to requests for comment.
Last month, the president of Canada-based DBRS Inc., a rival to
the three credit-rating firms, accused the Federal Reserve of
effectively shutting smaller rating firms out of the U.S.
securitization market. President Daniel Curry complained that
asset-backed securities are eligible to participate in the Fed's
new TALF only if they receive a AAA-ratings from S&P, Moody's
or Fitch.
-By John Kell, Dow Jones Newswires, 201-938-5285, john.kell@dowjones.com
