Credit Rating Agencies Under Scrutiny by the SEC
 
June 2, 2008
 

The SEC sent letters to Moody’s, Standard & Poor’s and Fitch on Friday, May 23, 2008, requesting that the rating agencies provide the SEC with information regarding their methodology for credit rating decisions; their policies and procedures to detect errors, specifically surrounding the ratings of structured finance products; and information regarding errors in the ratings of structured finance products detected over the last four years, including any corrective actions taken. It is anticipated that the SEC will formally propose new rules concerning credit rating agencies on June 11, 2008.

Ratings agencies have come under scrutiny recently for their ratings of certain finance products that were adversely affected by the credit market crisis and the widespread defaults on U.S. subprime mortgages. Additionally, it was recently reported that Moody’s had wrongly assigned credit ratings to approximately $4 billion worth of European debt products called constant proportion debt obligations, or CPDOs.

Apparently, a coding error in a computer model resulted in the CPDOs being rated at a level four notches higher than they should have been. Moody’s has been conducting a voluntary internal investigation into this matter.

This is not the first time that credit rating agencies have come under fire for their actions. During 2001 and 2002, credit rating agencies were criticized for failing to identify problems at Enron and Worldcom.

The SEC also has plans to strengthen its monitoring of the top five U.S. investment banks following the issues that Bear Stearns encountered. The SEC currently monitors Morgan Stanley, Lehman Brothers, Merrill Lynch, Goldman Sachs and Bear Stearns as part of its consolidated supervised entities program.