Rating agency efforts not enough, say critics

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NEW YORK (CNNMoney.com) -- After enduring months of scrutiny and attacks, the big three credit rating agencies were criticized once again Thursday, with critics charging that their recent efforts to shore up their shaken rating systems are too little and too late.

Among the most vocal was New York Attorney General Andrew Cuomo, who called the changes "more like public relations window dressing than systemic reform," in a statement issued late Thursday.

Others voiced similar sentiment including Jim Kaitz, president and CEO of the Association for Financial Professionals, which represents 16,000 finance professionals.

"I think we would sum it up as being too little, too late," said Kaitz.

Credit rating agencies came under fire late last summer when the market began assigning blame for the credit crisis, as critics claimed that ratings assigned to mortgage-related securities by the big three - Standard & Poor's, Moody's and Fitch - were blinded by cozy relationships with debt issuers.

To date, major financial firms have endured losses totaling more than $100 billion as a result of bad bets on mortgage securities and some analysts are warning that that number could grow.

Critics have called on the rating agencies to change to their previous business model where they would instead sell subscriptions to their ratings instead of taking payment from debt underwriters to avoid potential conflicts.

But amid continued scrutiny from regulators as well as customers, the three firms announced their own initiatives to strengthen their ratings systems.

Standard & Poor's said Thursday that it was implementing 27 new initiatives, including updating its rating models and providing more detailed information to investors about the rating process.

"The actions we are taking will serve the public interest by building greater confidence in credit ratings and supporting the efficient operation of the global credit markets," S&P President Deven Sharma said in a statement.

Earlier this week, Moody's Investors Services said it was considering changes in how it rates mortgage-related securities, including adding a warning label to these products.

One perhaps unintended consequence of this week's announcements is that it will make ratings more difficult to understand, said Lawrence White, a professor at New York University's Leonard N. Stern School of Business who spoke before the Senate Banking Committee on the issue in September.

"In a sense, it's a reversal of one of the biggest pluses, which was you could just look at the rating and get a quick picture of what the story was," said White.

So far, however, regulators have kept quiet on this week's announcements.

The Securities and Exchange Commission, which oversees the industry, declined to comment on the planned changes, but the government agency has been investigating the issue since this fall and could make recommendation improvements as early as June, Reuters reported.

H. Sean Mathis, the managing director of the boutique investment bank Miller Mathis who testified before a Congressional committee on the issue, noted however, that the damage has already been done, as his clients, which include state pension funds that rely on these ratings, have had their confidence shaken in the ratings firms they once relied on.

"It's going to be a long time and we'll have to see lot of good products that don't go sour before anyone trusts them on structured finance," said Mathis.