Credit rating agencies may have been slow to react to sub-prime crisis
CREDIT rating agencies including Moody’s Investors Service and Standard & Poor’s (S&P) are facing an investigation by the European Commission into their response to the sub-prime credit crisis.“The review will focus on issues such as governance, management, conflict of interest and resourcing,” Ms Antonia Mochan, a spokesman for EU Internal Market and Financial Services Commissioner Charlie McCreevy, said yesterday. She said: “The recent sub-prime crisis and the credit rating agencies’ reaction to the credit market situation has made it even more important for us to do this.”
Officials at Moody’s and S&P declined to provide immediate comment. Investors and politicians have criticised credit rating firms for misjudging the risk on bonds backed by mortgages to homeowners with poor or limited credit.
United States Senate Banking Committee chairman Christopher Dodd earlier this month said regulators might need to ensure that the rating services are not biased in their assessments of bonds because of fees they earn.
Banks warned about a potential crisis in sub-prime last year. But S&P and Moody’s started downgrading the ratings of mortgage-backed securities on a significant scale recently, reported the Financial Times (FT).
FT reported yesterday that Mr McCreevy met senior S&P executives last month and expressed his concern about the apparently slow reaction of some agencies. He has invited European securities regulators to meet next month to discuss ratings agencies and the problems that have surfaced with regard to rating-structured products.
An unnamed commission official said: “The securitised sub-prime mortgage market would not have grown to the extent that it did without the favourable ratings given by some agencies.”
FT said the agencies previously defended themselves from legal action by maintaining that their ratings are simply opinions, covered in the US by constitutional free speech protections. The agencies said they would downgrade only upon evidence showing that mortgages or other assets are underperforming rather than on a speculative basis.— BLOOMBERG
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