Even though unrealistically high credit ratings contributed heavily to the subprime crisis, the companies that issue them will reap a billion dollars from the Federal Reserve's latest rescue effort, The Wall Street Journal reports.
Each bond issue of the $7 billion released by the Fed last week will need to be rated by at least two of the three big rating firms — Moody's, Standard & Poor's or Fitch Ratings — before the bonds can be sold.
The new bond issues mean the Obama administration is effectively rewarding the same firms that contributed heavily to the subprime crisis by providing wildly inaccurate financial product ratings.
If the ratings companies make the same mistake this time, the Federal Reserve and the Treasury (that is, the taxpayers) will be on the hook for some major losses.
At a recent Senate hearing, Federal Reserve Chairman Ben Bernanke said the central bank has reviewed the models used by major rating companies and is "comfortable" they can rate securities eligible for the new program "in an appropriate way."
On April 15, the Securities and Exchange Commission will hear from the ratings firms about what they have done to improve things on their own — and also from people who think the entire issuer-pays model needs to be scrapped.
"There have been some very thoughtful proposals out there, and we've invited those people to come and speak," SEC head Mary Shapiro recently told Congress.
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