After a 10-month investigation, the Securities and Exchange Commission (SEC) found that some of the most prominent credit-rating firms such as Moody’s Corp., McGraw-Hill Cos.’ Standard & Poor’s unit, and Fimalac SA’s Fitch Ratings have been giving low-quality ratings and following poor procedures when analyzing subprime mortgage debt. With such inflated ratings, the credit-rating firms were able to collect higher fees from clients.
According to the SEC, analysts from these firms have downplayed the amount of risk of certain deals, ignored conflicts of interest, or knowingly gave low-quality ratings to collateralized-debt obligations. One rating firm even gave lower loss expectations than it should have on subprime second-lien mortgages, which are particularly risky mortgages that have incurred large losses.
The SEC also noted that it could file lawsuits against any rating firm if it has violated antifraud laws. So far, Standard & Poor and Moody’s Corp. have made efforts to improve their rating models, and Fitch denies that the SEC has found any problems with their firm’s analytical processes.
The SEC plans to continue examining several other rating firms in the near future. Unless rating firms make better quality ratings a higher priority than profits, the market could lose confidence about their securities, which are based on these ratings.