Rating agencies seen weathering regulatory storm

By Walden Siew and Rachelle Younglai - Analysis

NEW YORK/WASHINGTON (Reuters) - The three big credit rating agencies are being shaken by a host of new regulations designed to correct shortcomings and curb their influence on investors.

But after the dust settles, they most likely will continue to dominate Wall Street.

The biggest threat comes from reforms put forward by the U.S. Securities and Exchange Commission, including one to wean investors and Wall Street off the risk-assessment reports provided by Standard & Poor's (MHP.N), Moody's Investors Service (MCO.N) and Fitch Ratings (LBCP.PA).

The three agencies are blamed for failing to spot the pitfalls in the mortgage securities market, contributing to massive losses for global banks and crippled credit markets.

But with SEC Chairman Christopher Cox and European Union Internal Market Commissioner Charlie McCreevy both expected to leave office early next year, analysts wonder if regulators have the time and authority to implement meaningful reforms.

"I don't think much is going to change. They will keep making money ... because some guy in Oklahoma wants a Moody's or S&P rating," said Philippe Stephan, former director of product development at Moody's KMV, a unit that assesses companies' credit quality.

For decades, S&P, Moody's and Fitch have dominated the landscape. Wall Street turned to them to rate their products and investors relied on them to determine the quality of companies and securities.

Now, the SEC reforms such as eliminating a requirement that money market funds hold highly rated securities means investors may turn to other avenues to evaluate a security's credit worthiness.

The SEC is also proposing prohibiting credit-rating agencies from structuring the same products that they rate, and to bar anyone who helps determine a rating from negotiating fees. The agency's comment period for the proposal closes in early September and the SEC's Cox has signaled that new rules are a priority.

Some say the SEC's plan has the potential to revolutionize the securities market by opening up the rating business and allowing broker dealers, investors and banks to find alternate ways of evaluating credit.

But others believe the opinions of the big three raters will still be valued.

"Rating agencies will adapt their businesses and investors and intermediaries will still value their opinion," said Stuart Kaswell, a partner at Bryan Cave who specializes in compliance and broker-dealer issues.

"The basic idea of going to someone who is more knowledgeable than you are and getting another opinion ... that will continue."

BIG THREE RATERS UNDER PRESSURE

That is not to say that Standard & Poor's, Moody's Investors and Fitch Ratings are not in trouble.