Congress Mulls New Regulations For Credit-Rating Firms
September 30 2009 - 6:43PM
Dow Jones News
Former Moody's Investors Service employees told lawmakers
Wednesday that poor quality ratings still plague the industry and
urged them to consider new regulations, but Democrats and
Republicans appeared starkly divided on what those rules should
look like.
The main disagreement centers around whether or not Congress
should make it easier for investors to sue credit-rating firms for
the quality of their ratings - a key aspect of a U.S. House
proposal opposed by the industry and many Republicans.
Credit-rating agencies have been criticized for exacerbating the
financial crisis by giving overly generous ratings to complex
securities. Some say firms like Standard & Poor's, Moody's and
Fitch Ratings are conflicted because debt issuers pay them to
evaluate and rate their products.
The former Moody's employees appeared before the U.S. House
Oversight Committee. Later in the day, the heads of Standard &
Poor's, Moody's and Fitch Ratings told lawmakers on the House
Financial Services Subcommittee on Capital Markets that no analysts
who made those grave errors during the financial crisis have been
fired - a fact that angers some critics.
The lead analysts involved were "disappointed" and "surprised,"
said Fitch Chief Executive Stephen W. Joynt. "We've done a lot of
thoughtful soul-searching," he said.
Earlier Wednesday, former analyst Eric Kolchinsky, who was
suspended from Moody's on Sept. 3, told the oversight committee
that the company continues to inflate its ratings on complex
securities and that raters are so driven in a quest for revenue
they just don't know when to say no when asked to rate a
product.
"As an example of how little things have changed, asset-backed
securities collateralized debt obligations are being rated once
again," said Kolchinsky in his testimony. "This toxic product needs
to be consigned to the dust bin of bad ideas but, unfortunately,
there are still no incentives for rating agencies to say no."
Capital markets subcommittee Chairman Paul Kanjorski, D-Pa.,
said that lack of accountability for ratings is the reason why
Congress should consider new liability provisions for raters in
order to address the "tremendous conflicts of interest."
His draft bill goes further than the Obama administration
proposal by changing the pleading standards in private securities
litigation cases to make it easier for investors to sue. It would
also empower the SEC to take civil action against raters and create
a collective liability regime that would force nationally
designated firms to be held responsible for each other's actions in
an effort to get them to better police one another.
"This reform will hopefully incent participants in this
oligopoly to police one another and release reliable, high-quality
ratings," Kanjorski said, although he noted he is open to other
ways to fix the problem.
Republicans, however, appeared skeptical about the idea.
Provisions establishing a new liability standard are
"potentially problematic and warrant careful study," said House
Financial Services ranking member Spencer Bachus, R-Ala.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com.