Rating Agencies Told They 'Betray Public Trust,' By Rep. Kanjorski

Mr. Kanjorski made his comments in urging passage of draft legislation that would leave credit rating agencies independent but require them to comply with standards they create and police themselves.

At the hearing, rating agencies acknowledged that their ratings performed poorly, and said they would support many of the reforms proposed in draft legislation recently unveiled by Rep. Kanjorski.

The draft bill would give the U.S. Securities and Exchange Commission power to dictate how credit rating agencies determine ratings. It is titled "The Accountability and Transparency in Rating Agencies Act."

However, the rating agencies said they would oppose certain provisions of the legislation, including one that would make the rating agencies responsible for each others' ratings through collective liability.

In justifying his proposal, Rep. Kanjorski said, "This reform will hopefully incent participants in this oligopoly to police one another and release reliable, high quality ratings."

"This reform, however, is not the only way to fix this problem, and I am open to other ways to achieve this objective," he added.

Rep. Kanjorski said he was seeking bipartisan support for his bill and that he would like his subcommittee to discuss and vote on the proposed legislation soon, hopefully by mid-October.

In response, Devon Sharma, president of Standard & Poor's, said his company would support most of the legislative provisions proposed by Rep. Kanjorski in his discussion draft, and would provide details about its concerns in coming weeks.

Mr. Sharma also acknowledged "that S&P is profoundly disappointed with the performance of many of its ratings on" mortgage-backed securities.

He added that rating agencies "expect that some portion of the debt we rate, even highly rated debt, will default."

But, he said, "our ratings of MBS in this time period have been unusually unstable and their performance has not matched our historical record."

Mr. Sharma said changes to federal securities laws that would treat rating agencies "far more harshly than other defendants in securities fraud lawsuits" would interfere with rating agencies' "analytical independence." He said his firm opposes them because they were "problematic, and, in our view, would bring unintended harm to the markets."

Ray McDaniel, chairman and CEO of Moody's, said some of the proposed measures do not "address the more fundamental vulnerabilities of credit markets and ultimately could, if implemented, reduce transparency and the availability of diverse, independent opinions."

Instead, he said, policymakers should review the weaknesses in the structured finance market, specifically that the companies issuing the information should provide more information to the general public about transaction structures and asset pools.

In his testimony, Mr. McDaniel did support components of the legislation proposed by Mr. Kanjorski that would establish an agency within the Securities and Exchange Commission to oversee the credit rating industry, as well as authority for the SEC to undertake enforcement actions against rating agencies that don't comply with regulatory requirements.

Moody's, he said, would also support provisions of the proposed legislation that would require rating agencies to establish governance standards "to appropriately manage conflicts of interest."

He conceded that while Moody's already has such a policy in place, this requirement will help restore confidence in our industry by ensuring that all rating agencies are subject to enhanced regulatory oversight."