Rating firms should suffer fines, clawbacks -study
By Walden Siew
NEW YORK, Oct 29 (Reuters) - Major rating companies should incur fines and even a "clawback" of profits made if their ratings are later proven to be wrong, a new study said on Thursday.
Current rating practices are fraught with conflicts of interest that often put pension funds and investors at risk, according to professors Joseph Mason and Charles Calomiris, authors of the report.
Bond ratings remain flawed largely due to conflicts of interest among the raters, institutional investors and those firms' clients, including pensioners and stockholders in mutual funds, as well as banks and insurance companies, the study said.
The consequence is often low-quality ratings or inflated ratings, which played a significant role in the global credit crisis.
More regulation is needed to improve the ratings process, and to link the fees earned, or even penalties paid, by rating companies to objective measures of their performance, the report said.
"That penalty could take the form of a 'clawback' of the fees the agency has already earned on that product," the authors argued.
Calomiris is a professor at the Columbia University Graduate School of Business.
Mason, a longtime critic of the rating agencies, is a professor of finance at Louisiana State University.
Rating companies such as Standard & Poor's, Moody's Investors Service and Fitch Ratings have been targets of sharp criticism after the U.S. housing crash and global credit crunch, due to their role in rating mortgage securities.
Many of those securities had top AAA ratings, which were later re-rated as low as junk in some cases, after the securities' value plummeted.
S&P is part of the McGraw-Hill Companies (MHP.N), while Moody's Investors Service is owned by Moody's Corp (MCO.N) Fitch Ratings is part of the Fitch Group, a majority-owned subsidiary of French company Fimalac SA(LBCP.PA). (Reporting by Walden Siew; Editing by Jan Paschal)
