Financial Regulatory Forum

US Treasury warns on credit ratings regulation

By Reuters Staff
August 5, 2009

WASHINGTON, Aug 5 (Reuters) – The Obama administration is resisting calls to get involved with ensuring that credit ratings are reliable and said on Wednesday this would force investors to rely even more on the ratings.

Although credit rating agencies have been accused of assigning top ratings to complex securities that later crumbled in value, the government should not be in the business of regulating their methodologies or ratings performance, a top Treasury official told Congress.

“To do so would put the government in the position of validating private sector actors and would likely exacerbate over-reliance on ratings,” the Treasury’s assistant secretary for financial institutions Michael Barr said.

Moody’s Corp, McGraw-Hill Cos Inc’s Standard & Poor’s and Fimalac SA’s Fitch Ratings have been blamed for contributing to the financial crisis by not doing enough due diligence on securities linked to shoddy mortgages.

As part of the Obama administration’s plan to overhaul the country’s financial regulation, it has proposed increasing disclosures and ways to crack down on what some consider the firms’ conflict of interests.

The industry is dominated by Moody’s, Standard & Poor’s and Fitch Ratings, which are all paid by the banks or issuers whose products they rate. Critics call this so-called issuer paid model a conflict of interest. Barr warned against prescribing a specific business model.

The Senate Banking Committee is holding a hearing on Wednesday to examine the administration’s plan to reform the credit rating industry. (Reporting by Rachelle Younglai, editing by Gerald E. McCormick)

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