Wednesday, June 4, 2008

Major rating agencies near deal on reforms-reports

June 4 (Reuters) - The three major credit rating agencies are near a settlement with New York Attorney General Andrew Cuomo to reform some of their core business practices, including how they collect fees, the Wall Street Journal and the New York Times said Wednesday, citing people familiar with the matter.

The Journal said an announcement of a settlement involving Moody's Corp's (MCO.N: Quote, Profile, Research) Moody's Investors Service, McGraw-Hill Cos' (MHP.N: Quote, Profile, Research) Standard & Poor's and Fimalac SA's (LBCP.PA: Quote, Profile, Research) Fitch Ratings could come this week. The Times, meanwhile said the talks may still fall apart.

Neither the rating agencies nor Cuomo's office immediately returned calls seeking comment.

A settlement could result in big changes for the roughly $5 billion-a-year credit rating industry, similar to changes to analyst research engineered by Cuomo's predecessor, Eliot Spitzer.

In 2002 and 2003, Spitzer pushed the financial services industry to separate analyst research from investment banking activity. This has resulted in stock research analysts becoming much more likely to assign hold and sell ratings. In the wake of the U.S. subprime mortgage crisis and ensuing global credit crunch, investors, regulators and politicians have criticized the agencies for failing to properly analyze securities backed by mortgages before assigning top ratings.

Agencies have been criticized for feeding the U.S. housing slump and credit market problems by long assigning high ratings to securities they should have known were risky, and then downgrading them quickly once the risks surfaced.

Under the proposed settlement, a rating agency will charge fees in stages for various analytical tasks, disclose every three months all transactions they were asked to rate and actually do rate, the Times said.

The agencies are also mulling a change to the way they charge fees for ratings, making it harder for investment banks to pit one agency against another in order to obtain better ratings, the Times said, citing people familiar with the matter.

In addition, the agencies will assist in Cuomo's broader probe into how Wall Street packaged mortgages into securities, in exchange for immunity from prosecution, the Times said.

The rating agencies will also establish new standards for how investment banks review mortgage loans, the Times added.


No comments: