Congress Probes Ratings Companies on MF Global: Report

Published January 05, 2012

| Reuters

Congressional investigators have launched an inquiry into the work of credit rating firms that examined MF Global Holdings Ltd's risky bets on European government bonds and whether they overlooked crucial information in their evaluations.

Congressman Randy Neugebauer, who chairs an investigative panel of the House Financial Services Committee, sent letters to Moody's Corp Chief Executive Raymond McDaniel and Standard & Poor's Ratings Services President Douglas Peterson asking for detailed information about their procedures for determining MF Global's credit-worthiness.

In letters dated Dec. 27, Neugebauer asked each of the rating agencies to respond to his inquiries into the matter by Jan. 15 and to turn over a lengthy list of documents concerning bankrupt futures brokerage MF Global.

The subcommittee is also seeking to hold a hearing in the coming weeks on the role of the ratings firms in the MF Global mess, a source familiar with the matter said on Thursday.

The Wall Street Journal first reported about the congressional inquiry.

MF Global filed for bankruptcy on Oct. 31 after it was forced to reveal that it had made a $6.3 billion bet on European sovereign debt, spooking investors and customers.

Downgrades of MF Global's debt rating by Moody's to near-junk status on Oct. 24 helped trigger the panic among investors. Moody's and Fimalac SA's Fitch Ratings later both downgraded MF Global to junk on Oct. 27.

McGraw-Hill Cos Inc's S&P, meanwhile, warned of a possible downgrade on Oct. 26, but did not take any rating action until after MF Global filed for bankruptcy.

A few months prior to Moody's first downgrade of MF Global, the company revealed it had made repurchase-to-maturity trades collateralized with European sovereign debt in the footnote of a filing with the U.S. Securities and Exchange Commission. Those transactions allowed MF Global to move its exposure off its balance sheet, even though it faced enormous risk in the event of a default.

That disclosure caught the eye of the Financial Industry Regulatory Authority, which began looking into the matter and along with the SEC ultimately forced MF Global to put up more capital. MF Global disclosed the capital charge on Sept. 1.

In his letters to S&P and Moody's, Neugebauer asked the rating agencies when they became aware of the repo-to-maturity transactions and whether or not they had any reason to question whether such trades put MF Global at risk.

Spokesmen for S&P and Moody's both declined to comment on the letters.

It was not immediately clear on Thursday whether or not congressional investigators would also be asking Fitch questions about MF Global. Spokesmen for Fitch did not respond to requests for comment. (Reporting by Sarah N. Lynch; additional reporting by Alexandra Alper in Washington and Rachana Khanzode in Bangalore; Editing by Gerald E. McCormick)

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