Big 3 credit rating firms agree to reform practices


Posted at Jun 06 2008 01:05 AM | Updated as of Jun 06 2008 09:05 AM

Agence France-Presse

WASHINGTON - The big three credit rating agencies agreed to reform their practices relating to complex mortgage-backed securities, New York attorney general Andrew Cuomo said Thursday.

Standard & Poor's, Moody's Investors Service and Fitch agreed to overhaul their practices criticized for their role in the meltdown of mortgage securities and resulted in a global credit squeeze.

The agreement came after an investigation by Cuomo's office into how the firms rated large mortgage security portfolios held and traded by major Wall Street banks.

Such portfolios, especially those holding securities tied to US subprime home loans, have endured multibillion dollar losses in the past year and played havoc with banks' wider finances.

"The mortgage crisis currently facing this nation was caused in part by misrepresentations and misunderstanding of the true value of mortgage securities," Cuomo said in a statement.

He said the wider US economy was continuing to suffer the "aftershocks" relating to the sharp downturn in the housing and mortgage markets, especially losses tied to subprime loans granted to Americans with little credit.

The new reforms are designed to boost the independence of the rating agencies and their business operations, as well as ensuring that they gain adequate information from banks holding and trading big mortgage security portfolios.

Securities and Exchange Commission chairman Christopher Cox welcomed the reforms brokered by Cuomo's office.

He said Cuomo's actions had been "motivated by our mutual desire to promote ratings with integrity and curb the questionable practices that contributed to the credit market turmoil."

The reforms were unveiled as a widespread credit crunch continues to buffet Wall Street and the US financial system. Some analysts say ailing mortgage-backed securities, which have dived in value amid a persistent housing market downturn, have exacerbated the credit squeeze.

Under the overhaul, the rating agencies have agreed to disclose information about all securitizations submitted for their review and will develop improved ways to judge and rate bank holdings of mortgage-related portfolios.

The rating agencies will also be paid by banks for their assessments regardless of whether a given bank selects them to rate a mortgage portfolio or not.

This measure is designed in part to deter banks from shopping around among the rating agencies to see if a rival agency judges a portfolio more highly than its peers.

In the ultra-competitive world of Wall Street, a higher rating on a large mortgage portfolio can considerably help a bank's financial standing.

Cuomo's office is continuing a related probe into the mortgage industry.