Rating Firms Seem Near Legal Deal on Reforms

New York Times (06/04/08) P. C1; Anderson, Jenny; Bajaj, Vikas
There have long been concerns about potential conflicts of interest facing ratings firms, given that they are compensated by investment banks and corporations for rating their securities; and this issue has been pushed to the forefront by the subprime mortgage crisis. Questions have been raised about how these loans were packaged into securities and whether investment banks failed to provide important information about the process. New York Attorney General Andrew Cuomo is negotiating a deal with Standard & Poor's, Moody's Investors Service and Fitch Ratings that would require them to impose fees in phases instead of when they rate the securities, which would allow investment banks and corporations to seek out the best rating. Additionally, the ratings firms would compel investment banks to submit due diligence reports; and in exchange for immunity, they would assist Cuomo's investigation into the mortgage securitization process. It remains to be seen whether Cuomo will file any civil or criminal charges against investment banks for withholding information. With regard to the proposed plan, former Securities and Exchange Commission chief accountant Lynn Turner says, "It aids transparency, but it doesn't solve the problem, because the same people--the issuers--are paying for the services, as opposed to the old model where the investors paid for the services."