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Kai Ryssdal: If you had to pick one word to define the whole subprime debacle, you could do worse than this: Bonds.
People have been throwing around phrases like mortgage-backed securities and collateralized debt obligations for the better part of a year now, but it'd be easier to just call 'em what they are: Bonds. Fancy ones, but fundamentally just promises to return capital to investors, plus a little bit of interest.
As we all know by now though, that is not what's been happening and so the companies whose job it is to rate the quality of those bonds have been taking all kinds of heat for their role in the credit crunch.
Moody's, Standard and Poor's, and Fitch are the big three. They're working on a deal with the New York Attorney General aimed at limiting conflicts of interest. The Securities and Exchange Commission is going to take a crack at reforming them and the agencies themselves are working overtime to repair their reputations as Marketplace's Amy Scott reports.
Amy Scott: If anyone knows the value of reputation, it's folks in the restaurant business, where a bad review or health inspection can shut a place down.
At Waterstone Grill in New York's financial district, executive chef Chad Tibbets serves seafood dishes like grilled salmon with mango chutney.
Scott: So if your menu said Wild Alaskan Salmon and it turned out to be farm raised and people found out about that, do you think that could affect the restaurant's business?
Chad Tibbets: Oh, no doubt. I mean, then they call into question everything on the menu. Is it really, you know, is it really beef? I don't sugar-coat anything on the menu. Some chefs might, but I keep it real.
The credit rating agencies didn't keep it real. On their menus, toxic pools of subprime mortgages looked as tasty as Triple-A treasury bonds.
Just around the corner from Chad Tibbets' restaurant, Standard and Poor's is scrambling to set things right.
Vickie Tillman: We're talking to pension funds, chief investment officers, asset managers, central banks, ministers of finance, lots of regulators and we're talking to the Hill, we go down to Washington, we talk to parliaments...
Vickie Tillman is head of ratings services at S&P. The company has drawn up a 27-point plan to restore faith in its debt ratings. Tillman spoke to me just before she flew to Australia to make her pitch to that country's treasury.
Tillman: We believe that we need not only to talk and clarify our position, but we need to hear from them in terms of "Do you think what we're doing is really gonna work for ya? How we doin'?
The plan addresses some criticisms: that the agencies got too cozy with the companies whose bonds they rated, and that their methods failed to detect risks in the subprime mortgage market. Now analysts will rotate every five years. S&P will hire an ombudsman and an outside firm to keep an eye on its practices. Fitch and Moody's have taken some steps of their own.
Sylvain Raynes has worked for both S&P and Moody's. He's now a consultant. Raynes says these efforts are all window dressing.
Sylvain Raynes: A reputation is like a virginity. Once you lose it, it does not come back. This is what the rating agencies have to understand. If they come back in some form, they will basically have lost most of their power.
But how important is reputation, really? The ratings agencies have been tarnished before. Moody's, S&P and Fitch failed to foresee the collapse of Enron and Worldcom. Fingers were pointed. Congress held hearings.
Jerome Fons: And then after those events, actually, the ratings business thrived.
Jerome Fons would know. He's former head of credit policy at Moody's. Fons says regulations ensure a steady stream of business flows to the rating agencies. Many institutions, like pension funds and insurance companies, can only buy bonds if they've been rated by a so-called nationally recognized statistical rating organization, so Fons says bond issuers have no choice but to hire the agencies to rate their debt.
Fons: Because of regulation, I don't think reputation is that important. They have the regulatory license, therefore they're already, if you will, sanctioned.
That sanction may be in jeopardy now that the agencies have attracted the ire of regulators worldwide.
The SEC is reconsidering its own rules requiring the use of ratings. The commission also wants to reign in conflicts of interest in the business. And it may propose a separate rating scale for more complex bonds like mortgage-backed securities.
After months of investigating, the Commission is expected to propose reforms tomorrow.
In New York, I'm Amy Scott for Marketplace.