Investors give ratings agencies an FFF

By Paul R. La Monica, CNNMoney
2009-6-15 13:04:27

NEW YORK (CNNMoney.com) -- Is the government going to make life even tougher for Standard & Poor's, Moody's and other credit rating firms?

Many investors have already lost faith in the major rating agencies in the wake of the financial meltdown. Critics argue that S&P, Moody's and others were slow to downgrade risky securities and companies that were tied to subprime loans and other exotic assets.

Now it appears that government regulators want to further marginalize the rating firms. The Obama administration will unveil its much anticipated financial regulatory reform plan later this week.

Treasury Secretary Tim Geithner and Director of the National Economic Council, Lawrence Summers, unveiled some of the components of the plan in the Washington Post Monday.

Geithner and Summers wrote that the administration will seek to "reduce investors' and regulators' reliance on credit-rating agencies."

Doing so probably makes sense since the way many ratings agencies conduct business has created some conflicts. One big issue: The system is set up so issuers of bonds pay the major rating firms to have their debt graded. As a result, some propose that big ratings agencies should be paid by investors. That's already how many smaller ratings firms do business.

Even though Geithner and Summers did not provide any more details, the news did pressure stocks of the companies that own the two biggest rating firms. Spokespeople at S&P and Moody's were not immediately available for comment.

Talkback: Should regulators impose more rules and regulations on credit rating agencies? Leave your comments at the bottom of this story.

On an overall gloomy day for the markets (the Dow was off more than 2% in early afternoon trading), shares of S&P parent company McGraw-Hill (MHP, Fortune 500) fell nearly 5% while Moody's (MCO) stock was down almost 6%. (McGraw-Hill also owns a large educational publishing division, as well as BusinessWeek magazine and customer research firm J.D. Power & Associates.)

John Mitchell, co-manager of the Manning & Napier Financial Services fund, which owns shares of both companies, said he thinks much of the concerns about regulation are already priced into both stocks. He called a switch to a model where investors pay for ratings the "worst-case scenario for the industry" but added he didn't think that would happen.

"There probably will be additional oversight and regulation and more disclosure requirements from the rating agencies but no major changes to the business model," he said.

	Investment Basic Investment Overview Investment Approache Fundamentals Data Investment Stories www.fxj108.com	Investors give ratings agencies an FFF By Paul R. La Monica, CNNMoney 2009-6-15 13:04:27 NEW YORK (CNNMoney.com) -- Is the government going to make life even tougher for Standard & Poor's, Moody's and other credit rating firms? Many investors have already lost faith in the major rating agencies in the wake of the financial meltdown. Critics argue that S&P, Moody's and others were slow to downgrade risky securities and companies that were tied to subprime loans and other exotic assets. Now it appears that government regulators want to further marginalize the rating firms. The Obama administration will unveil its much anticipated financial regulatory reform plan later this week. Treasury Secretary Tim Geithner and Director of the National Economic Council, Lawrence Summers, unveiled some of the components of the plan in the Washington Post Monday. Geithner and Summers wrote that the administration will seek to "reduce investors' and regulators' reliance on credit-rating agencies." Doing so probably makes sense since the way many ratings agencies conduct business has created some conflicts. One big issue: The system is set up so issuers of bonds pay the major rating firms to have their debt graded. As a result, some propose that big ratings agencies should be paid by investors. That's already how many smaller ratings firms do business. Even though Geithner and Summers did not provide any more details, the news did pressure stocks of the companies that own the two biggest rating firms. Spokespeople at S&P and Moody's were not immediately available for comment. Talkback: Should regulators impose more rules and regulations on credit rating agencies? Leave your comments at the bottom of this story. On an overall gloomy day for the markets (the Dow was off more than 2% in early afternoon trading), shares of S&P parent company McGraw-Hill (MHP, Fortune 500) fell nearly 5% while Moody's (MCO) stock was down almost 6%. (McGraw-Hill also owns a large educational publishing division, as well as BusinessWeek magazine and customer research firm J.D. Power & Associates.) John Mitchell, co-manager of the Manning & Napier Financial Services fund, which owns shares of both companies, said he thinks much of the concerns about regulation are already priced into both stocks. He called a switch to a model where investors pay for ratings the "worst-case scenario for the industry" but added he didn't think that would happen. "There probably will be additional oversight and regulation and more disclosure requirements from the rating agencies but no major changes to the business model," he said.