S&P draws criticism as sets ratings reform

By Jonathan Stempel and Richard Barley

NEW YORK/LONDON (Reuters) - Standard & Poor's unveiled an overhaul of its ratings process on Thursday, responding to widespread criticism of the quality and accuracy of credit ratings.

S&P, a unit of McGraw-Hill Cos (MHP.N), announced 27 steps that it said would boost confidence in credit ratings. It came on the heels of planned reforms announced this week by its major rivals, Moody's Corp's (MCO.N) Moody's Investors Service and Fimalac SA's (LBCP.PA) Fitch Ratings.

Ratings agencies have come under fire from regulators and investors who say they helped precipitate the U.S. subprime mortgage crisis and credit tightening that began in 2007.

"The supposed reforms announced today by Standard & Poor's and by Moody's on Tuesday are too little, too late," New York state Attorney General Andrew Cuomo said in a statement. "Both S&P and Moody's are attempting to make piecemeal change that seem more like public relations window-dressing than systemic reform." He pledged to continue investigating their roles in the mortgage crisis.

Critics say the agencies at first assigned high ratings to hundreds of billions of dollars of securities linked to low-quality debt, only to exacerbate market turmoil by later rapidly downgrading many of those same securities.

This has contributed to write-downs piling up in the financial industry, hurting stock prices and causing losses in a variety of pension and mutual funds.

S&P said it will appoint an ombudsman to look at potential conflicts of interest among analysts, and hire an outside firm to review compliance and governance processes.

The agency will also periodically rotate analysts to ensure they do not get too close to the companies they rate, and review the work of analysts who leave S&P to join issuers they rated.

S&P will add emphasis to factors not covered by traditional ratings, such as liquidity and volatility, and consider "what if" scenarios to prepare for market disruptions.

It also plans to flag structured finance ratings, to help distinguish them from corporate and government ratings. Many recent downgrades have affected mortgage- and asset-backed securities, and debt known as collateralized debt obligations.

"What they're doing is a step in the right direction, but I think the regulators will have their say," said Luis Maglanoc, head of credit research at UniCredit.

REGULATORS

Regulators and politicians are looking closely at the ratings agencies' business model, where ratings are paid for by issuers rather than investors, and also the efforts they have made to ensure the accuracy and reliability of ratings.

"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, (and) minimize even the potential for perceived conflicts of interest, Deven Sharma, president of S&P, said in a statement.

Earlier this week, Fitch announced plans to toughen how it rates $220 billion worth of structured products. Moody's said it may go further, abandoning its traditional letter grading system for a numeric scale for structured ratings.