Conn. AG questions bailout money for credit rating companies

NEW YORK -- Connecticut Attorney General Richard Blumenthal Monday said he has opened an investigation into why a Federal Reserve bailout program will steer up to $400 million to the three largest credit rating agencies, which have been widely criticized for their role in the current financial crisis.

The firms, Standard & Poor's, Moody's and Fitch Ratings, are expected to benefit from fees generated from rating securities related to the government's $1 trillion Term Asset-Backed Securities Loan Facility, or TALF. The Fed's program was created in November to unclog frozen credit markets by purchasing new securities backed by loans such as student, auto and credit cards.

The securities have to be rated by two or more "nationally recognized rating agencies," according to Fed rules. However, all three top agencies have come under a lot of fire for assigning top ratings to complex financial instruments based on subprime mortgages, only to later downgrade them, which caused havoc in the credit markets last year.

"It is outrageous that the very firms which facilitated the credit debacle are now being rewarded for their ineptitude," says Sean Egan, managing director of Egan-Jones, a small ratings agency.

Blumenthal sent a letter to Federal Reserve chief Ben Bernanke, asking him to revise the program. Blumenthal said the process "contradicts and undermines Congress' intent to enhance competition," and "rewards the very incompetence … that helped cause our current financial crisis."

Federal Reserve spokesman David Skidmore said: "We have received the letter and are considering a reply."

Blumenthal subpoenaed all three agencies for documents and information that relates to the rating agencies' "possible influence on TALF rules that steer them business."

Fitch said in a statement it "disagrees … that the rating agencies exerted 'possible influence' on the Federal Reserve in its determination of TALF rules." Moody's declined comment. S&P said the investigation is "without merit." Spokesman Ed Sweeney said: "It should also be noted that S&P's fees for this work are subject to fee caps."