EU’s Commissioner Rules Moody’s, S&P

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Von Dr. Oliver Everling | 16.Juni 2008

The European Union will impose stricter oversight of credit ratings companies such as Moody’s Investors Service and Standard & Poor’s in response to record losses by banks on subprime-mortgage bonds, reports Bloomberg’s John Rega. Charlie McCreevy, EU financial services commissioner, will propose „in coming months“ that firms register with authorities, he said in Dublin today, according to a speech text. The rules will include changes to the organizational structure at the companies, also including Fitch Ratings.

The EU measure, which may differ from U.S. proposals, goes beyond an existing voluntary code of conduct after a crash in the value of mortgage-backed bonds – some of them AAA rated – sparked a credit crunch and led to almost $400 billion of losses and writedowns at financial-services companies.

„No supervisor appears to have got as much as a sniff of the rot at the heart of the structured-finance rating process before it all blew up,“ McCreevy said. „Meaningful but targeted regulatory measures are now necessary.“ The initiative won’t address the content of credit ratings, which are opinions about a borrowers‘ likelihood of default, said McCreevy. The provisions will including „registration, external oversight and much better internal governance.“ He didn’t specify the proposed changes to organizational structure, writes Rega.

The largest rating companies are S&P, owned by McGraw-Hill Cos. of New York, and Moody’s, a unit of New York-based Moody’s Corp. Behind them is Fitch, a unit of Fimalac SA in Paris. Regulators estimate that structured finance accounts for half of the rating companies‘ revenue. Fitch spokesman Julian Dennison had no immediate response today.

The European Union will impose „mandatory“ oversight of credit-rating companies led by Moody’s Investors Service and Standard & Poor’s in response to banks‘ record losses on subprime-mortgage bonds. Charlie McCreevy, EU financial services commissioner, said in a speech in Dublin today he will „not wait indefinitely“ for ratings companies to „come forward with meaningful proposals to put their houses in order.“

European and U.S. officials are forcing an end to the agencies‘ self-regulation after a crash in mortgage bonds dried up lending and saddled banks with $400 billion of losses. The U.S. Securities and Exchange Commission proposed barring ratings companies from guiding investment banks on how to gain top rankings for some securities.

„The proposals are still very short on detail, but the intent of the EU is to move toward strong, tight regulation and the wording indicates they mean to go beyond the U.S.,“ Luis Maglanoc, a credit analyst at UniCredit SpA in Munich, said in a telephone interview. „The credit crunch has put regulators under pressure to do something.“ McCreevy said that a different EU policy in the coming months may lead to „some further convergence of approach“ with U.S. rules.

„We share the same goal of improving the transparency of structured products and ratings and believe the global market is best served by a consistent international approach by regulators,“ said Martin Winn, a spokesman for S&P in London. Moody’s spokesman Anthony Mirenda in New York said the company would be „responsive to authorities“, reports John Rega. „Moody’s remains fully committed to taking the necessary steps to restore confidence in our credit opinions and capital markets more broadly,“ he said. Fitch Ratings spokesman Julian Dennison had no immediate response today, according to John Rega.

McCreevy’s proposals reject the advice of national regulators and an advisory panel, which said new EU rules weren’t necessary. McCreevy has said that it’s not enough to add detail to an existing, voluntary code of conduct. „No supervisor appears to have got as much as a sniff of the rot at the heart of the structured-finance rating process before it all blew up,“ McCreevy said according to the publication of Bloomberg.

The initiative won’t address the content of credit ratings, which are opinions about a borrowers‘ likelihood of default, McCreevy said. The provisions will include „registration, external oversight and much better internal governance.“ The largest rating companies are S&P, owned by McGraw-Hill Cos. of New York, and Moody’s, a unit of New York-based Moody’s Corp. Behind them is Fitch, a unit of Fimalac SA in Paris.

Regulators estimate that structured finance accounts for half of the rating companies‘ revenue. Any EU legislation would need approval from national governments and the European Parliament to become law.

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