Ratings Agencies, To Blame For Some Of The Crisis, Could Now Benefit

The Federal Reserve is in the uncomfortable position of rewarding those who helped cause the financial crisis.

The government's latest rescue effort involves issuing more than $7 billion in bonds. Each of these bonds will have to be rated by at least two of the three largest ratings agencies: Moody's Investors Service, Standard & Poor's and Fitch Ratings.

This ratings work will generate fees for the agencies, potentially totaling hundreds of millions of dollars, the Wall Street Journal reports.

These firms dominate the credit-ratings business, and their imprimatur is considered crucial for investors that buy bonds and asset-backed securities. They have been vilified in recent months because their ratings on mortgage securities were widely off base.

Now the government is in the uncomfortable position of rewarding these same firms through a new program that will result in numerous companies issuing securities. If the ratings companies are wrong this time around, the Federal Reserve and the Treasury -- and therefore taxpayers -- will be on the hook for some losses.

According to the Journal, the ratings agencies typically charge as much as $120,000 for every $100 million in bonds they rate. Under the government's latest program to ease the credit crisis, if it is extended to the full $1 trillion, as the government plans, ratings agencies' fees could total from $400 million to as much as $1.2 billion.

To prevent taking on too much risk, the Fed is also requiring that its loans only be used to buy bonds that are rated the least risky, or triple-A. This could give the agencies some incentive to skew the ratings of the bonds higher.

Critics say Moody's, S&P, a unit of McGraw-Hill Cos., and Fimalac SA's Fitch have made few fundamental changes to the way they assess debt. Officials at all three firms say they have taken steps to avoid a repeat of past mistakes in assigning ratings.

They are still paid for their ratings by the companies whose bonds they rate, a potential conflict of interest. And much-anticipated competition for the three companies has failed to materialize so far.

Comments

[MakeAWish]

All the fraud evil doers are in bed together. This whole thing is a nightmare. These rating agencies are a joke with zero credibility. After what they have been a part of, how can anything they say or do have any relevance? Why not pull Grandma off the street and ask her to rate these bonds?

Our government is being run by clowns.

[dandypuddin]

But we all know that only ones to benefit at all from the looting of the middle class are the banksters. It is no surprise at all.

[munki]

Rating Agencies is ONE of the causes of the meltdown..­.

We the people should take them to the Federal Court...

Cause of Action - poor analysis led many financial institutions to loan - lost of public trust

Malpractice!

[tailgateshirts]

The real problem is how many different auditors is a company going to pay to have come through and verify their financial statements? There gets to be a point where its overkill and burdensome on a company.

There needs to be a better way to rate, some form of more open disclosure on assets?

[notAMoron]

There should be a licensing process to license rating agencies and companies who sell bonds should be required to disclose inside information semi-publicly to those licensed rating agencies.

Rating agencies should be paid by the people who rely on their information to purchase bonds not by the people who rely on their information to sell bonds. This would create a dramatic paradigm shift in whom the rating agencies are responsible and would alter their profit objective from rating as many bonds as possible to rating bonds as accurately as possible because they could charge more money for more accurate information.

[lightningbolt]

Our entire financial system is rigged and most of the key people are crooks. The Fed, the ratings agencies, the banks, the insurance companies, and the government conspired to rip off the taxpayers and they have done it successfully so far. Both the Bush and Obama administrations and Congress are covering for them and preventing any real investigations and prosecutions to occur. Most of them have been bought through our campaign finance system which allows people with lots of money to buy favors from the government in return for campaign donations. Both parties have been infiltrated by these crooks and are now running both parties, making sure that no real accountability takes place. When the republicans screw the people, they are voted out and the democrats are voted in. Then the democrats screw the people and the republicans are voted in. The cycle continues and most people have no clue because they are too stupid and uninformed due to our failed education system and corrupt press.

[Hank10303]

The rating agencies, during the contract process, regarding all of the derivatives and swaps give opinions on the quality, security and soundness of each and every transaction. THEY LIED. At the very least they didn't check as they were obligated under their contracts to do. As a result each and everyone of them should be sued by every company that lost one dime depending on their opinions; that includes any companies that the government might take over. HINT.

[MESGAIN26]

As long as the fed is not truly FEDERAL but a private group of bankers, they will act in their own private interest vs. the public interest. Having a private central bank to which we pay interest seems like a stupid idea to me in the first place. They have complete control over the money supply and seem to be able to act on their own rules, rather than according to any laws in place. Just because the President appoints the Chairperson unfortunately carries no particular authority or enforcement

[MESGAIN26]

How has the Fed Chairman managed to avoid being the prime target of public anger? GIVEN that the Fed has a ( seat ) !! on the board of ( AIG ) Bernanke was there as the Federal Reserve presided over, and, I would argue encouraged, the inflation of the biggest Credit Bubble in history. In 2006 he was appointed by President Bush as Governor of the Federal Reserve Over this same period, and under the watch of the Federal Reserve, AIG accumulated massive, and historically unprecedented liabilities -- a truly incomprehensible $62 trillion of liabilities. WE MUST STOP THE FED , Does it alarm anyone that the FED is not an American entity? The United States Constitution explicitly gives congress the full authority to coin and print money. NOT THE FEDS,Why did congress give that authority to the Federal Reserve Bank (the FED)? The Fed is a privately held bank THE ENTIRE TAX BRACKET IS A FRAUD , Federal Reserve Act IS A FRAUD ,

[notAMoron]

These guys were probably more to blame than anyone, even AIG, Fannie, Freddie, Citi, etc.. They were the ones that gave these miserable MBS triple-a ratings and told people it was safe to buy them. When the credit markets froze it was because no one trusted the ratings being provided by the credit agencies.

They need to blow the lid off of these companies and open up companies which seek ratings to wider rating scrutiny. The world of investing in stocks revolves around the idea of an efficient market where all publicly available data is assimilated into the price of a stock as soon as it is made available. The world of bonds revolves around rating, these companies have access to inside information because the companies they are rating pay them to rate their company. They should set up an information exchange system for insider information which companies and people who wish to serve as rating agencies can have access to and remove the payment from the rated company, have the investors pay for the rating information. This would remove a conflict of interest for the rating agencies and it would provide them incentive to provide the most accurate rating as quickly as possible to the public.

[OneVoiceInACrowd]

Why again do we need ratings on Government Bonds? Has the Government ever failed to pay for the bonds it issued?

Aren't these the same agencies that retranched BBB stocks into AAA status.

Cramer has a better economical record that these dbags.

[notAMoron]

There aren't ratings on Federal debt because they can always increase taxes and or print money to pay debt. There are ratings on state and municipal bonds because states, cities, and state and city agencies do default and they are not able to print money and may not be able to raise taxes without a referendum, or if they do raise taxes people may choose not to stay there and move to a different city or state to avoid the taxes.

[OneVoiceInACrowd]

Ahhh, thanks

[yappnmutt]

the ratings agencies are the key to this entire mess yet they have largely escaped scrutiny and have not changed their business model. that's the real outrage.

[Minotaurus]

Why isn't the FED have its own agency for that with government working agents?????

[Hank10303]

Because the rating agency concept was a creation of business for business to make better business decisions. There is nothign wrong with having rating agencies - but when they lie they should be held accountable. The rating agencies, during the contract process, regarding all of the derivatives and swaps give opinions on the quality, security and soundness of each and every transaction. THEY LIED. At the very least they didn't check as they were obligated under their contracts to do. As a result each and everyone of them should be sued by every company that lost one dime depending on their opinions; that includes any companies that the government might take over. HINT.

[jsarets]

The Fed isn't part of the government, so what you're suggesting is pretty much the way it works today. The credit ratings cartel works for the Fed, which works for the banks, which work for the bond market.

[JZ735]

More stupidity.­..how much more of this is going to go on?

[Tyler-Durden]

why can't this work be done by SOMEONE ELSE?

CLEARLY THEY'VE ALREADY DEMONSTRATED THAT THEIR RATINGS AREN'T WORTH ANYTHING!!!

[rblaquinta]

regulation and oversight and things will work the way they should