Windfall for Credit Raters?
The big three credit rating companies have been vilified by many in Congress and the business world for their role in the meltdown of the financial system. But that hasn't kept the companies from an unexpected windfall in the latest government plan to unfreeze the flow of money.
The Wall Street Journal notes today that the Federal Reserve's new plan to lend money to investors who buy certain bonds requires that the bonds be Triple-A rated by at least two of the rating firms -- Moody's, Standard & Poor's and Fitch. As a result, the companies stand to collect millions in fees, the Journal calculates. [Editor's Note: Corrected from the original version.The Wall Street Journal now says its initial calculation of a $1 billion windfall for individual firms was incorrect because it failed to take fee caps into account. Credit raters "could earn tens of millions to a few hundred million dollars," the newspaper now estimates in a published correction.
In a statement published on Standard & Poor's Web site, David Jacob, executive managing director, says: "Contrary to erroneous and misleading press reports, S&P has been paid less than one basis point - or .01%, - for its TALF work and, in fact, we have caps on our fees on asset backed securities."]
At the root of the financial crisis were securities based on risky subprime home mortgages that were blessed as high quality by the credit raters. When defaults on mortgages gathered steam, the chain reaction led to trillions of dollars in losses for the world's banks and investors and a freeze in the credit markets.
As The Post reported in an investigative series in 2004, the big three credit raters became some of the most important gatekeepers in capitalism without the commensurate oversight or accountability. At the heart of the business is a conflict of interest, because the companies get the bulk of their revenue from the fees they charge to the very entities they are rating.
Officials at all three firms say they have taken steps to avoid a repeat of past mistakes in assigning ratings. Officials at Moody's, among others, have argued that the basic system is sound and just needs some better internal controls.
But some in Congress and at the new regime at the Securities and Exchange Commission have indicated they may try to retool the credit rating system. In December, the SEC adopted rules that tightened some standards, but SEC commissioners say they may seek a model that ends the inherent conflict of interest of collecting fees for ratings.
By The Editors |
March 20, 2009; 1:59 PM ET
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