Rating agencies may loose their status

/Financial Times, April 3, 03/ - The Securities and Exchange Commission is considering a more active role as a regulator of credit rating agencies, or it may end the official status of the agencies, effectively deregulating the ratings process in a bid to ensure greater competition, according to a senior SEC official. Annette Nazareth, director of market regulation at the SEC, said in testimony to a congressional committee on Wednesday that the regulator had to be "either in or out" and that the process of granting agencies "nationally recognized statistical ratings organizations" status would become more open. Ms Nazareth also rejected claims that the SEC was "asleep" on the issue of credit rating agencies, insisting that despite criticism of their role in the credit markets they were doing "remarkably well". Richard Baker, the Louisiana congressman who chaired the hearing, said he wanted to ensure that the rating agencies acted "with integrity, independence and professionalism". The hearing coincided with publication of a study of rating agency activity that suggested that the three main credit rating agencies were slow to cut a company's creditworthiness to junk status. Richard Johnson, an economist at the Federal Reserve Bank of Kansas City, said in the study that a comparison of ratings assigned by Standard & Poor's and Egan Jones Ratings found that they followed a pattern, with EJR's ratings assigned ahead of S&P's. The findings appear to reinforce claims by EJR that it is quicker than its official rivals to change credit ratings more accurately to reflect developments that affect a company's ability to repay its debt. In the most controversial recent examples of credit ratings seeming to be out of touch with reality, S&P, Moody's Investors Service and Fitch Ratings retained investment-grade ratings on Enron until four days before it collapsed in 2001. They took a similar stance on WorldCom until 42 days before it filed for bankruptcy last year. [2003-04-03]