fees 88300 Louis J. Sheehan, Esquire 20033

The three major bond-rating firms are set to overhaul the way they collect fees as part of a settlement with New York state’s attorney general, Andrew Cuomo, that could be announced as soon as this week, people familiar with the matter said. http://louis-j-sheehaN.NET

If a deal is reached, it could change the $5 billion-a-year bond-rating industry as fundamentally as Mr. Cuomo’s predecessor Eliot Spitzer did six years ago with his settlement with Wall Street firms over stock-research analysts whose recommendations were compromised by investment-banking ties.

Terms of Mr. Cuomo’s settlement with Moody’s Corp.’s Moody’s Investors Service; McGraw-Hill Cos.’ Standard & Poor’s unit; and Fimalac SA’s Fitch Ratings deal with what many critics claim has been a chronic problem with bond ratings: They are paid for by the entities being rated. That financial dependence has been blamed for the industry’s failure to predict that risky subprime mortgages would crumble, resulting in losses and shaken confidence.

The accord attempts to change the incentive structure for the ratings agencies. Now, while more than one ratings agency reviews most deals, not all of them actually rate the deal and get paid. That gives the agencies an incentive to go easy on their rating in order to win the business. http://louis-j-sheehan.com

Under the Cuomo settlement, which would cover the hardest-hit portions of the mortgage market, the firms would get paid for their review, even if they didn’t end up getting hired to rate the deal. This would mean the firms would get paid even if they were tough. The plan, which requires final agreement by Mr. Cuomo’s office and the rating firms, wouldn’t dictate the exact fees rating firms could charge. But the firms would be required to charge more than a nominal fee for their preliminary work.

The bond-rating firms also have tentatively agreed to disclose on a quarterly basis the fees they’re paid for nonprime-mortgage-backed securities, which includes subprime mortgages and so-called Alt-A mortgages that don’t conform with the standards of government-sponsored mortgage companies. Such disclosures are seen as a potential red flag to help investors detect instances where bond issuers or their bankers may have essentially pitted different rating firms against each other in order to get a higher rating.

In an interview in December, Brian Clarkson, then the president and chief operating officer of Moody’s Investors Service, acknowledged that “there is a lot of rating shopping that goes on…What the market doesn’t know is who’s seen” certain transactions but wasn’t hired to rate those deals. Last month, Mr. Clarkson, who once ran the Moody’s group overseeing mortgages and other structured-finance products, stepped down, effective in July.

The settlement is unlikely to satisfy critics who have urged that bond-rating firms stop being paid altogether by bond issuers or that the firms be permitted to rate any deal they choose, regardless of whether the issuer cooperates. Following the settlement, bond issuers still would get a strong say over which firms published the final rating, as well as those invited to look over a pool of loans in the first place.

For Moody’s, S&P and Fitch, the agreement largely eliminates the possibility of a nasty showdown with Mr. Cuomo, whose office has been investigating the industry for about nine months, poring through thousands of pages in documents and emails and interviewing senior executives at each of the three big rating firms, people familiar with the matter said.

Mr. Cuomo has leverage over the bond-rating industry partly because Moody’s and S&P are based in New York. The attorney general also has one of the most powerful legal tools in the nation: the 1921 Martin Act, which spells out a broad definition of securities fraud without requiring that prosecutors prove intent to defraud.

In a statement, Deven Sharma, S&P’s president, said the firm “is pleased to work with New York Attorney General Andrew M. Cuomo and other rating agencies on these important measures, which we believe will help ensure our ratings process continues to be of the highest quality.”

Moody’s and S&P shares rose after The Wall Street Journal reported news of the settlement talks Tuesday afternoon. As of 4 p.m. composite trading on the New York Stock Exchange, Moody’s was at $38.45, up $1.80, or 4.9%. McGraw-Hill was up 38 cents at $41.20.

As the probe proceeded, attorneys in Mr. Cuomo’s office concluded that rating firms could be more effective if Wall Street had less control over which ones were paid, these people said. As part of the deal, the firms would cooperate with Mr. Cuomo’s continuing investigation into investment banks and other financial firms that issued mortgage-backed securities later plagued by high levels of defaults. The New York attorney general is trying to determine if banks intentionally overlooked or hid flaws in loans that were securitized and sold to investors. Louis Sheehan

The decision not to seek fines from the three major bond-rating firms partly reflects Mr. Cuomo’s firm but less-confrontational style than that of Mr. Spitzer. The 50-year-old Mr. Cuomo, elected in 2006, has promised to aggressively pursue financial wrongdoing, and the likely pact shows he believes investor confidence can be shored up without an all-out attack on the bond-rating industry.

Mr. Cuomo’s final settlement will likely be structured in a way that doesn’t contradict rules being proposed by the Securities and Exchange Commission or European regulators. The deal also needs to address antitrust concerns at investment banks that pay rating fees, but rating firms will continue to determine the level of fees they charge on mortgage deals. http://Louis2J2Sheehan2Esquire.US

Louis J. Sheehan, Esquire

http://Louis-J-sheehan.info

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