Connecticut attorney probes ratings bailout "windfall"

BOSTON (Reuters) - Connecticut Attorney General Richard Blumenthal said on Monday he is investigating why a federal bailout program steers up to $400 million in business to three large ratings agencies.

Blumenthal's office said the program gives an unfair advantage to Moody's Investors Service, Standard & Poor's and Fitch Ratings and asked the three agencies to hand over documents related to his antitrust inquiry.

"This potential $400 million windfall overpays the Big Three raters and undercuts competitors -- another money reward for failure," Blumenthal said in a statement. "The same Big Three that overrated bonds now regarded as toxic assets will be rating new bonds issued to restart lending and solve the economic crisis they helped create."

Lack of competition in the ratings industry has long been a target of criticism. A number of regulations over the years have given favored treatment to ratings of "nationally recognized statistical rating organizations," or NRSROs, a designation held by only a handful of agencies.

Blumenthal also wrote to Federal Reserve Chairman Ben Bernanke, asking him to revise the program so that a number of smaller ratings agencies can also compete for the work.

"The Federal Reserve should not be favoring large market participants, whose mistakes helped precipitate the current crisis, over smaller ones seeking to break into the market," he wrote.

The Federal Reserve's $1 trillion TALF program, aimed at restarting consumer lending, requires that new securities be rated by two or more "major" nationally recognized statistical rating organizations.

Moody's Investors Service is a unit of Moody's Corp (MCO.N), while McGraw-Hill Co (MHP.N) owns Standard & Poor's and Fimalac (LBCP.PA) owns Fitch Ratings.

In a statement, Fitch Ratings said Blumenthal's investigation was "an unfortunate development stemming from incomplete or inaccurate information." The agency said potential fees it could receive for rating TALF-eligible securities are significantly less than first reported by the press.