Are Rating Firms Getting a Free Pass?

On Nov. 21 a court-appointed trustee estimated that at least $1.2 billion is unaccounted for at failed brokerage MF Global. Sunk by some risky bets on European sovereign debt, the firm run by former New Jersey Governor Jon Corzine filed for Chapter 11 bankruptcy late last month, the eighth-biggest failure in U.S. corporate history. While that’s tragic for some clients, it’s an outright embarrassment for the three largest ratings firms, Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings. They all rated MF Global investment grade a week before its bankruptcy. “Where is the outrage?” asks James H. Gellert, chief executive officer of Rapid Ratings, which had rated MF Global at junk for two years. “Things have gotten absurd.”

The House Financial Services Subcommittee on Oversight and Investigations will hold a hearing on Dec. 15 to investigate the collapse of MF Global. The panel will also probe the role of credit ratings firms, says a staff for a representative on the panel who asked not to be identified as plans haven’t been completed. (The ratings agencies’ mishandling of the Enron and Worldcom bankruptcies also prompted congressional hearings.)