Connecticut Attorney General's Office
Press Release
Attorney General Writes To U.S. Treasury Secretary Geithner Calling On Fed To Stop Steering $400 Million To Credit Rating Agencies That Enabled Economic Meltdown
May 14, 2009
In a recent letter to Treasury Secretary Timothy F. Geithner, Blumenthal urged that Geithner contact the Federal Reserve and request that it reverse its wrong-headed policy.
"It's time to shatter the Old Boys Club of rating agencies," Blumenthal said. "This senseless restriction rewards the same rating agencies who are at the center of our current financial crisis and whose shortcomings made these bailout programs necessary in the first place."
Blumenthal contacted Geithner after Federal Reserve Chairman Ben S. Bernanke wrote to Blumenthal reiterating his refusal to stop giving the Big Three credit rating agencies -- Moody's Investors Service, Fitch Ratings and Standard & Poor's - the exclusive right to rate securities eligible for the Federal Reserve's $1 trillion Term Asset-Backed Securities Loan Facility (TALF), while cutting out smaller competitors who can also do the work.
TALF, which is intended to restart consumer lending, requires financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies (NRSROs)."
Because the Federal Reserve Board deems that only Moody's, Fitch and Standard & Poor's are considered "major," the requirement effectively shuts out their seven competitors who are approved by the U.S. Securities and Exchange Commission to do the work.
Blumenthal said these rules undermine recent federal legislation intended to encourage competition in the credit rating market by breaking the Big Three's longstanding stranglehold on the market.
"The Federal Reserve's policy is short sighted because it virtually guarantees a concentrated, non-competitive market in structured security credit ratings for the foreseeable future by shutting out other qualified rating agencies that stand ready to compete for TALF work," Blumenthal said. "Overdependence on the Big Three credit raters is exactly what led to the current financial debacle."
Bernanke, responding to an April 6 letter from Blumenthal, said the Federal Reserve limited ratings to the Big Three in order to protect the Treasury and the U.S. taxpayer.
Even in defending these rules Bernanke acknowledged to Blumenthal that, "the rating methods employed by major NRSROs for asset backed securities have exhibited significant shortcomings."
Blumenthal said, "I strongly disagree that shutting out competition and relying only on rating agencies that helped create our economic meltdown protects the U.S. taxpayer.
"The Federal Reserve's stated reason for favoring the Big Three that it has 'customarily employed,' perpetuates the Old Boy's Club mentality that has been condoned for too long. The policy seems hardly likely to instill the sort of confidence in the due diligence undertaken by the Federal Reserve that U.S. taxpayers deserve and the markets merit.
"Just as the Federal Reserve must perform its own due diligence on this issue, the Treasury Department should require the Federal Reserve to publicly explain what due diligence was undertaken and why, as a result of this due diligence, only the three major credit rating agencies should be entrusted with rating the securities issued as part of the TALF. Otherwise taxpayers and investors remain unable to accurately assess the credit risk of asset-backed securities.
"If our financial system is going to continue to look to credit ratings for guidance in the world of structured finance, investors and the public in general need to have reason to believe that the credit rating agencies can accurately assess credit risk for these securities. The way to instill this belief is not by further entrenching the comfortable oligopoly of the past that generated such questionable work product."
View all the letters - (PDF-439KB)