The three large credit ratings agencies yesterday struck a deal with the New York Attorney General Andew Cuomo to reform their business practices. As part of the deal, the firms would cooperate in the attorney general’s broad investigation into Wall Street’s packaging of subprime loans, according to a press release issued by the AG’s office.
In response, Securities and Exchange Commission Chairman Christopher Cox issued a statement yesterday that hailed the deal as an “excellent example of how state and federal authorities can work together in a complementary manner…The Attorney General’s actions, as well as the comprehensive new rules for all nationally registered credit rating agencies that the Commission will consider next week, are motivated by our mutual desire to promote ratings with integrity and curb the questionable practices that contributed to the credit market turmoil.”
Per terms of the agreement, the credit rating agencies will alter how they are paid by investment banks for providing ratings on loan pools. In addition, the ratings firms will now require that investment banks provide due diligence data on loan pools for review prior to the issuance of ratings. This is intended to ensure that data, not previously disclosed to the rating agencies, will be received and reviewed by them before any bonds are rated. It is also seen as move to make it harder for investment banks to the play the firms against one another to obtain a better rating. S
The agreement with Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings will increase their independence and increase transparancy in the residential mortgage backed securities market.