Saturday, December 22, 2007

Moody's franchise is eroding

Egan-Jones says it wins status as ratings agency

SEC decision creates competitor for S&P, Moody's, Fitch

SAN FRANCISCO (MarketWatch) -- Egan-Jones Ratings said late Friday that the Securities and Exchange Commission has granted the firm status as an official ratings agency, providing more competition for firms like Standard & Poor's, Moody's Investors Service, Fitch Ratings and Dominion Bond Rating Service.

The SEC issued an order on Friday granting Egan-Jones status as a nationally recognized statistical rating organization, or NRSRO.

There are now eight NRSROs. Two Japanese firms, Japan Credit Rating Agency and Ratings and Investment Information, were recognized by the SEC earlier this year and insurance specialist A.M. Best was granted the status in 2005.

The SEC's decision means that Egan-Jones' ratings will now hold more weight. Many institutional investors are restricted from buying securities that are rated below certain levels by officially recognized agencies. Companies also can sell debt more easily if they have a higher rating from an NRSRO.

It may be less positive for established rating agencies like Moody's (MCO) .

During the 1990s there were far fewer NRSROs, leaving Moody's and S&P without much
competition. But controversy about the accuracy and timeliness of official credit ratings, combined with political pressure, encouraged the SEC to grant NRSRO status to more firms in recent years.

This year's subprime-mortgage crisis has heightened controversy surrounding rating agencies. Several mortgage-related securities have been downgraded this year from AAA to junk status overnight. That's increased concerns that leading ratings agencies overlooked the risks of these securities when they were sold, and were slow to respond as the underlying collateral deteriorated. End of Story

Alistair Barr is a reporter for MarketWatch in San Francisco.

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