Connecticut Attorney General's Office
Press Release
Attorney General Questions Fed Program That Steers Up To $400 Million To Big Three Raters, Asks Fed To Reconsider
April 6, 2009
The attorney general also wrote Federal Reserve Chairman Ben Bernanke asking him to revise the program to stop giving the three agencies an advantage and assure that their seven smaller competitors can compete for the work.
Blumenthal said that the program undermines recent federal legislation explicitly aimed at encouraging competition in the credit rating business by breaking the Big Three's longstanding stranglehold on the market.
The Federal Reserve rules for its $1 trillion Term Asset-Backed Securities Loan Facility (TALF), which is intended to restart consumer lending, require financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies." Because Moody's, Fitch and Standard & Poor's are the only credit raters that meet those criteria, the requirement effectively shuts out their competitors from as much as $400 million in possible fees.
As part of his antitrust inquiry, Blumenthal subpoenaed Moody's, Fitch and Standard & Poor's for all documents and information. The investigation concerns the Big Three rating agencies' possible influence on TALF rules that steer them business, not the Federal Reserve or the TALF itself.
Blumenthal said, "This potential $400 million windfall overpays the Big Three raters and undercuts competitors -- another money reward for failure. The same Big Three that overrated bonds now regarded as toxic assets will be rating new bonds issued to restart lending and solve the economic crisis they helped create. The Federal Reserve is rewarding the same companies who helped burn down the house, in effect steering them cash to rebuild what they destroyed.
"These rules shower fees on the Big Three -- strengthening and entrenching their market dominance and neutering federal legislation designed to break their stranglehold. Former Federal Reserve Chairman Alan Greenspan testified that the agencies' overrating of securities was 'the core of the problem' with the financial markets, making these rules inexplicable.
"The old boys' club must be closed. A corporate culture and camaraderie that protects prerogatives and profits while shutting out competition and scrutiny is no longer acceptable -- or affordable. Main Street Americans expect honest, fair and open markets, not rigged rules that enrich a few powerful insiders. Credit rating agencies and others responsible for this economic catastrophe must be held accountable -- and prevented from repeating practices that brought our economy to the brink.
"I will vigorously and aggressively investigate this situation, fighting to force open the rating market to assure accurate and reliable risk assessments," Blumenthal added.
Blumenthal's letter to Bernanke says, "Further, limiting the number of acceptable credit ratings agencies under the TALF program solely to the three major credit rating agencies contradicts and undermines Congress' intent to enhance competition; solidifying the major credit rating agencies' market dominance to the detriment of the other qualified NRSROs (Nationally Recognized Statistical Rating Organizations). Even more inexplicably, it rewards the very incompetence by Standard & Poor's, Moody's Investors Service, and Fitch Ratings, that helped cause our current financial crisis. In effect, the policy handsomely rewards failure. Indeed, it enables those specific credit rating agencies to profit from their own self-enriching malfeasance.
"On October 23, 2008, your predecessor, Dr. Alan Greenspan, testified before the House Committee on Oversight and Government Reform that 'unrealistically positive rating designations by the credit agencies was, in my judgment, the core of the problem,' referring to the current credit crisis. I am sure you are aware that Dr. Greenspan's assessment of the major credit rating agencies' poor performance is widely shared. Indeed, the explicit purpose of the Credit Rating Agency Reform Act is 'to improve ratings quality for the protection of investors … by fostering accountability, transparency, and competition in the credit rating industry.' Congress specifically stated that accomplishing these important goals was necessary because of the 'failures by the large credit rating agencies to warn investors in a timely manner about the impending bankruptcies of Enron, Worldcom, and others.'"
Blumenthal's letter continued, "I strongly urge the Federal Reserve to reassess and revamp its current policy and to adopt a policy that gives all properly registered NRSROs the same chance to compete for work rating securities for the Federal Reserve liquidity enhancement facilities, such as the TALF. The Federal Reserve should not be favoring large market participants, whose mistakes helped precipitate the current crisis, over smaller ones seeking to break into the market."
View the entire letter to Chairman Bernanke - (PDF-120KB)