Attorney General Richard Blumenthal released a letter calling on the U.S. Department of Treasury to intervene in the Federal Reserve bailout program that gives the Big Three credit rating agencies Moody's Investors Service, Fitch Ratings and Standard & Poor's the exclusive right to rate securities eligible for the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF). This cuts out smaller competitors who can also do the work.
Blumenthal's request was announced in a State of Connecticut Attorney General's office press release,
In a recent letter to Treasury Secretary Timothy Geithner, Blumenthal urged that Geithner contact the Federal Reserve and request that it reverses its policy.
"It's time to shatter the Old Boys Club of rating agencies," Blumenthal said. "This senseless restriction rewards the same rating agencies who are at the center of our current financial crisis and whose shortcomings made these bailout programs necessary in the first place."
Because the Federal Reserve Board deems that only Moody's, Fitch and S&P are considered "major," the requirement effectively shuts out their seven competitors who are approved by the U.S. Securities and Exchange Commission to do the work. Blumenthal said these rules undermine recent federal legislation intended to encourage competition in the credit rating market by breaking the Big Three's longstanding stranglehold on the market.
According to market reports, the U.S. Federal Reserve is now considering letting rating agencies besides these three major firms rate a range of securities eligible for TALF.
"Although ratings provided by only the three major agencies are currently eligible for the TALF, the Federal Reserve is in the process of analyzing the potential for expansion to include other agencies," Fed chairman Ben Bernanke said in a letter to Connecticut Attorney General Blumenthal dated April 13.
At the beginning of May, the Fed said it is reviewing whether to let all rating agencies that want to rate CMBS under the TALF to participate. According to market reports, that review is still in process.