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Cuomo gets a deal on rating overhaul

Jill Barshay Jun 5, 2008

Cuomo gets a deal on rating overhaul

Jill Barshay Jun 5, 2008


Bob Moon: Some of the investors who bought mortgage-backed bonds before they turned bad have now been asking this question: Who’s watching the watchdog when it comes to the agencies that are supposed to alert us when particular bonds are more risky?

Today, the state of New York reached an accord with the bond rating agencies — Standard and Poors, Moody’s and the like. They’ve been in hot water recently for giving toxic bonds a green light.

New York Attorney General Andrew Cuomo’s been investigating the agencies’ relationships with the companies whose bonds they rate and he says he’s come up with some reforms.

Our New York bureau chief Jill Barshay reports.

Jill Barshay: Cuomo says the ways bonds are rated right now is open to corruption.

Andrew Cuomo: When the rating agencies are only getting paid upon a successful completion of a transaction,
there are incentives, natural incentives in the economics, cause the rating agency to want to see that deal closed. And if a certain rating is required to close that deal, then there’s a natural economic incentive to make that happen.

Here’s the way it used to work: A bond issuer would ask agencies to rate its deal, then pick — and pay — the one it liked the best. Now, an issuer will have to pay all of those agencies, no matter which one it chooses.

Michael Youngblood buys mortgage bonds for FBR Investment Management. He says Cuomo’s solution hasn’t been fully explained yet, but he likes the idea.

Michael Youngblood: It’s critically important. The credit crisis that began after July 10, 2007 can be largely attributed to a lack of confidence in the rating agencies.

But critics say the new fee structure won’t change a thing. Sean Egan is managing director of Egan Jones ratings. He says there’s still an incentive for rating agencies to issue inflated grades.

Sean Egan: To get the call on the next investment banking project, you probably would have had to issue a fairly attractive rating on the prior call.

Right now, the new fee structure only applies to mortgage bonds issued in New York State. But the SEC is could endorse the new system nationally — perhaps as soon as next week.

In New York, I’m Jill Barshay for Marketplace.

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