G7 report skewers rating firms; Wall St shrugs

By Walden Siew

NEW YORK (Reuters) - Wall Street said on Friday that while a G7 report calling for reforms to avoid future financial crises was a positive step, its proposals were too cosmetic to have a substantive impact.

The Financial Stability Forum report, commissioned by the Group of Seven nations, called for tougher standards for rating companies and stricter capital requirements for banks.

The report's recommendations come in the wake of a global credit crisis that has felled chief executives at Standard & Poor's, Citigroup, Merrill Lynch & Co, and UBS AG, and led to the near collapse of Bear Stearns Cos.

The FSF represents regulators and finance ministers from the United States, Japan, Britain, Canada, France, Germany and Italy.

"You have already seen discussions in the U.S. on increasing capital requirements," said Benjamin Halliburton, chief investment officer at Tradition Capital in Summit, New Jersey. "Doing so on an international basis will be somewhat welcome news, but it's just shutting the barn door after the cow has gone.

"Increasing capital requirements now is not really going to alleviate the current pain in credit markets," Halliburton added. "It may prevent the pain in future."

The FSF recommendations include a separate rating scale for structured debt versus corporate bonds, proposals to raise capital requirements for complex, debt and additional requirements to address risks on bank trading books.

The report also said banks should explain more deeply the risks on their balance sheets.

Any immediate change or market impact will be limited, investors and analysts said.

The bursting of the U.S. housing bubble began to ripple through Wall Street last summer, roiling global markets.

Since then, ratings agencies Moody's Corp, Standard & Poor's, and Fitch Ratings, owned by Fimalac, have cut hundreds of billions of dollars worth of subprime mortgage-related securities, including top "AAA-rated" debt that have plummeted to junk bond status.

"One of the important triggers of the current turmoil was the precipitous decline in confidence in ratings of structured credit products," the report said. "Poor credit assessments ... contributed both to the build-up to and the unfolding of recent events."

All three main rating companies said they are eager to work with the FSF on improving ratings going forward.

"We support the FSF's efforts to bring greater transparency, stability and confidence to the capital markets," Deven Sharma, the president of S&P, which is owned by McGraw-Hill Cos Inc. , said in a statement.

Sharma, in an interview with Reuters on Thursday, rejected an FSF recommendation for a different rating scale. S&P is looking at using "separate identifiers" and not a completely new rating system, Sharma said.