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Debt-rating firms agree to fee deal

The move aims to reduce their incentive to give favorable grades to win business.

June 06, 2008|From Times Wire Services

Wall Street's three major debt-rating companies said Thursday that they would adopt a new fee structure designed to reduce their incentive to give favorable ratings on securities backed by sub-prime mortgages.

Moody's Investors Service, Standard & Poor's and Fitch Ratings agreed to the change under an accord with New York Atty. Gen. Andrew Cuomo, who has been investigating the roots of the sub-prime crisis, including how the value of some mortgage bonds could plunge a year or two after they received triple-A ratings.

The deal with Cuomo applies only to debt backed by U.S. sub-prime and other so-called non-prime home loans.

Until now investment banks looking to issue mortgage bonds could typically approach all three rating companies for an initial review at no charge. That enabled the banks to hire the rating firm offering the best grade, Cuomo's office said.

The rating companies now have agreed to charge for their initial reviews. Doing so will reduce their incentive to give a favorable grade, Cuomo said.

The rating firms also agreed to require investment banks to provide more detailed data on packaged loans before a rating can be issued. And the rating firms must disclose the standards used to make ratings.

The changes are to be implemented within six months.

"The agreement, I believe, is a major, dramatic reform of the marketplace," Cuomo said at a news conference in New York.

Rating firms had favored such rules for some time, he said, but none of them wanted to act alone.

Joining the attorney general at the news conference were S&P President Deven Sharma, Fitch Ratings President Stephen W. Joynt and Moody's Investors Service Chief Operating Officer Michel Madelain.

Joynt echoed Cuomo's assessment.

"These measures should restore investor confidence in ratings and in the mortgage markets," he said.

Sharma said S&P was committed to "transparency, openness and strengthening" the rating process. "We continue to believe the more our customers and market participants know how we do our work, the better," he said.

The Securities and Exchange Commission is set to vote Wednesday on rules to limit conflicts of interest in the rating industry and to require rating firms to disclose detailed data on the assets underpinning the mortgage-backed securities they rate.

Shares of Moody's Corp. and S&P parent McGraw-Hill Cos. jumped because Cuomo's inquiry has not resulted in sanctions against the firms. Moody's gained $1.75 to $41.38 and McGraw-Hill rose $1.22 to $45.10. Shares of Fitch's parent, Paris-based Fimalac, closed up $1.82 to $49.

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