What the Fed: Rating Agencies Win By Default

As the TALF plan cranks up the volume from a measly $200 billion to $1 trillion, the big winners look to be the ratings agencies.

TALF, aka the Term Auction Lending Facility, was created to help the companies and businesses that couldn't get money from the credit markets -- the money they in turn lend to consumers. Lenders can put up a wide array of questionable collateral to borrow this money.

This is where the ratings agencies enter the picture. The government insists it is working to minimize the risk to taxpayers and is hiring companies like Moody's(MCO Quote), Fitch(FIM.FP Quote) and Standard & Poor's, which is owned by McGraw-Hill (MHP Quote), to check out the collateral and deem it worthy.

Those are the same agencies that the SEC found "did not always document significant steps in the ratings process -- including the rationale for deviations from their models and for rating committee actions and decisions -- and they did not always document significant participants in the ratings process." The report can be found on the SEC's website at http://www.sec.gov/news/studies/2008/craexamination070808.pdf.

Yet the companies stand to earn "anywhere between $400 million and $1.2 billion" in fees, according to The Wall Street Journal.

One of the first TALF loans is backed by Citigroup(C Quote) credit card loans - with the top AAA credit rating. Citigroup said itself that provisions for credit losses increased by $4 billion in 2008, reflecting rising unemployment, bankruptcies and the housing crisis. Increases in delinquencies and credit losses are expected to continue in 2009.