In the aftermath of the subprime crisis and resulting credit crunch, Congress is encouraging the SEC to increase its policing of the ratings agencies (Fitch, Moody’s, and Standard & Poor’s). The ratings agencies have come under severe criticism since they were forced to downgrade thousands of mortgage-related investments after making overly optimistic initial calls about the quality of such investments.
The ratings agencies have been accused of having serious conflicts of interest which influenced them into giving unduly favorable ratings to many mortgage securities. Critics have suggested that the agencies’ ratings were affected by their direct involvement in structuring many of the very securities that they were rating and by the huge fees paid to them by the issuers of the securities. These accusations seem supported by recent articles in The Wall Street Journal which have reported that Moody’s, on occasion, switched ratings analysts from specific deals at the request of the Wall Street firms and altered its approach on certain deals after the Wall Street firms complained.
Congress, led by New York senator Charles Schumer, has also been inquiring into conflicts of interests affecting the ratings agencies. “There has to be a lot more done about conflicts of interest,” Senator Schumer said.
The SEC is considering new rules to regulate more tightly the rating companies. According to Wall Street Journal correspondents Aaron Lucchetti and Kara Scannell, the SEC has been “looking at a range of possible rules that would apply to rating companies, including a new scale for measuring mortgage-related and other structured-finance bonds. The SEC is also considering conflict-of-interest issues in ratings and whether various securities rules should temper reliance on bond ratings.”
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