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Scott Jagow: The big three ratings agencies will be called into the principal’s office today. I’m talking about Fitch, Moody’s, Standard & Poors. The SEC wants to know how in the world these guys gave triple-A ratings to mortgage bonds that turned out to be junk. Marketplace’s Amy Scott has more.
Amy Scott: The SEC is expected to take aim at conflicts of interest in the ratings business. Investment banks pay Moody’s, Fitch, and Standard & Poors to rate their bonds. Critics say competition for that business led the agencies to throw objectivity out the window.
Joseph Mason teaches finance at Louisiana State University. He says the ratings agencies often help design the very bonds they rate. The SEC is considering putting a stop to that.
Joseph Mason: That is one of the many open secrets on Wall Street. Ratings agencies continue to insist that they don’t engage in this practice. And yet everyone on the Street knows they do.
Commissioners may require more disclosure of the agencies’ ratings methods. They could also propose a separate rating scale for volatile securities like mortgage-backed bonds. The public will have a chance to comment on the reforms before a final vote.
In New York, I’m Amy Scott for Marketplace.
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