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U.S. regulators to probe credit rating agencies

Federal regulators said Friday they are reviewing the role credit-rating agencies played in the mortgage market debacle for people with weak credit.
/ Source: The Associated Press

Federal regulators said Friday they are reviewing the role credit-rating agencies played in the mortgage market debacle for borrowers with weak credit.

The Securities and Exchange Commission “has begun a review of credit rating agency policies and procedures,” SEC spokesman John Nester said Friday.

That review, he said, will include what ratings mean and whether conflicts of interest were created if rating agencies gave advice to issuers of mortgage debt and originators.

The credit-rating agencies, whose ratings are used by investors to gauge the riskiness or safety of mortgage-backed bonds and other forms of debt, are subject to SEC oversight enacted last year.

Critics, however, say the three biggest ratings agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — failed to give investors adequate warning of the risk of mortgage securities containing subprime loans.

A Fitch spokesman said in an e-mail that the company is cooperating with inquiries from regulators, including a subpoena from New York Attorney General Andrew Cuomo. A Moody’s spokesman said the company will “fully assist” regulators in their examinations. An S&P spokesman couldn’t immediately provide a comment.  

The agencies are vulnerable to conflicts of interest because they are paid by the companies whose bonds they rate, critics also charge.

In written testimony submitted Wednesday to a House committee for a hearing on the housing market’s woes, Erik Sirri, the SEC’s director of market regulation, said the commission is studying whether to require disclosure of other types of performance statistics for bonds rated by the agencies — apart from historical data on default rates and downgrades.

In recent weeks, House and Senate lawmakers have said they plan to examine what role the three main credit-rating agencies played in the housing market downturn.

The agencies are also under scrutiny in Europe, where investors who got slammed by unexpected defaults in securities backed by U.S. home loans, are particularly upset. European securities regulators say they plan their own examination of the credit-rating agencies.

In Congressional testimony, newspaper op-ed columns and elsewhere, the agencies defend their track record of analyzing the mortgage market in recent years and say they have adequate protections against conflicts of interest.