Posted on 08 Apr 2009
Connecticut Attorney General Richard Blumenthal is questioning why up to $400 million in federal bailout money is going to the big three credit rating agencies that he says helped create the economic meltdown.
Blumenthal said Monday that he is investigating why a $1 trillion government bailout program designed to unfreeze the credit markets steers money to Moody's, Fitch and Standard & Poor's and shuts out their six smaller competitors.
He said the companies may have violated antitrust laws, and he alleged they overrated toxic assets before the meltdown.
"The net result here is that up to $400 million in fees will be showered on the same ratings agencies whose mistaken ratings and inflated ratings led to the economic crisis," Blumenthal said. "It is another reward for failure."
Blumenthal said he subpoenaed the companies for documents last week and asked Federal Reserve Chairman Ben Bernanke in a letter sent Monday to revise the bailout program to stop favoring the three rating agencies.
The program, created by the Federal Reserve and the Treasury Department, is called the Term Asset-Backed Securities Loan Facility.
It provides loans to big investors and companies to buy newly issued securities backed by consumer debt, stimulating lending for auto, education, credit card and other loans.
The program starts by providing up to $200 billion in financing to investors, such as hedge funds, private equity funds and mutual funds, to buy up the debt. It has the potential to generate up to $1 trillion in lending.
Blumenthal said the program requires financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies." He said Moody's, Fitch and Standard & Poor's are the only raters that meet the criteria.
Spokesmen for Fitch and Standard & Poor's said they were reviewing Blumenthal's comments and would provide responses later Monday. A message was left for Moody's.
A message was also left for a Federal Reserve spokesman.
Blumenthal's new actions expand his existing antitrust investigation of the three rating agencies. He sued the firms last July, alleging they gave artificially low credit ratings to cities and towns that ultimately cost taxpayers millions of dollars in unnecessary insurance and higher interest payments.
The three firms have denied those allegations and said the lawsuit is without merit.
Blumenthal said the three agencies have become an "old boys' club" on Wall Street and their monopoly must be broken up.
"The Fed is strengthening and entrenching the stronghold held by the Big 3," he said.
Securities and Exchange Commission Chairman Mary Schapiro said last month that the SEC may need to ask Congress for broader authority to supervise the Wall Street credit-rating agencies. Schapiro has suggested the SEC should explore ways to diminish the market's dependence on ratings by the big agencies. The three firms dominate the $5 billion-a-year industry.
The SEC was given new authority over them in 2006 legislation, but Schapiro has said she isn't sure whether it's enough.