Fallout: The Financial Crisis

SEC considers new alternative to credit ratings

Nancy Marshall-Genzer Mar 3, 2011
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Fallout: The Financial Crisis

SEC considers new alternative to credit ratings

Nancy Marshall-Genzer Mar 3, 2011
HTML EMBED:
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TEXT OF STORY

BOB MOON: The loud pop of the housing bubble called dramatic attention to misleadingly high ratings that got stamped on risky and bad home mortgages. Regulators are under orders from Congress to come up with alternatives to the ratings agencies. And they’ve taken up that task this week.

Let’s turn to Marketplace’s Nancy Marshall Genzer, live in Washington. Nancy, if these ratings are so questionable, why rely on them at all?

NANCY MARSHALL GENZER:

GENZER: Well actually Bob, there are government regulations that force funds to rely on them. For example, some funds in your 401K can only invest in things that have gotten a triple A rating from these agencies. Yesterday, the Securities and Exchange Commission proposed new rules that would reduce the reliance on rating agencies. Money market funds oculd actually rate investment themselves.

MOON: Well, letting fund managers rate their own investments would certainly reduce reliance on the rating agencies.

GENZER: True. But some people say that could make things worse — they say funds might end up investing in riskier things. And they’d have to hire new analysts to rate investments, and investors could be stuck paying for those higher overhead costs. I talked to Howard Cure about this. He’s a bond analyst at Evercore Wealth Management.

HOWARD CURE: They would have to, I don’t know, double triple their staff, maybe even more, and that could potentially put a strain on the finances of these mutual funds.

The SEC is still open to other ideas. The rules published yesterday are just preliminary. Now there will be a period of public comment before final rules are issued. So, Bob, if you have any good ideas, tell the SEC.

MOON: I’ll scratch my head. Nancy Marshall Genzer in Washington, thanks.

GENZER: You’re welcome.

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