Connecticut AG: Fed TALF Criteria Favor Big Three

The ratings eligibility criteria for the Federal Reserve's $1 trillion Term Asset-Backed Securities Loan Facility unduly favors the three "major" credit rating agencies whose mistakes helped fueled the financial crisis, Connecticut Attorney General Richard Blumenthal complained in a letter sent yesterday to Fed chairman Ben Bernanke.

Because the three major rating agencies - Standard & Poor's, Moody's Investors Service, and Fitch Ratings - are the only nationally recognized statistical rating organizations that meet TALF eligibility criteria, the Fed's requirements effectively shut out the major NRSROs' competitors from as much as $400 million in possible fees, Blumenthal said in a statement, announcing he plans to investigate the matter.

"I strongly urge the Federal Reserve to reassess and revamp its current policy and to adopt a policy that gives all properly registered NRSROs the same chance to compete for work rating securities for the Federal Reserve liquidity enhancement facilities, such as the TALF," Blumenthal wrote.

A Fed spokesman said, "We have received the letter and will be considering a reply."

Fitch called Blumenthal's probe "an unfortunate development stemming from incomplete or inaccurate information."

The rating agency said a March 20 front-page article in the Wall Street Journal incorrectly stated that the rating agencies could earn $1 billion in revenues from rating securities under the TALF program, Fitch said.

The paper ran a correction acknowledging that it failed to take into account that credit rating companies cap their fees for rating asset-backed securities. Fitch also said it "disagrees with the attorney general's supposition that the rating agencies exerted 'possible influence' " over the Fed's TALF rules.

Standard & Poor's said Blumenthal's probe "is without merit" and that the attorney general "fails to recognize S&P's strong track record rating consumer asset-based securities ... that will be included in the TALF program."

A spokesman for Moody's declined to comment.

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