Rating Agencies 'Betray Public Trust,' Rep. Kanjorski Charges

Washington

Rating agencies betrayed not only the public trust "but also their special status under our laws," the chair of a House Financial Services Subcommittee charged last week.

Rep. Paul Kanjorski, D-Pa., chair of the Capital Markets Subcommittee of the House Financial Services Committee, said the agencies had taken an "ask me no questions, I'll tell you no lies" approach toward rating residential mortgage-backed securities.

Such securities initially garnered satisfactory ratings before their collapse helped prompt the nation's financial and credit crisis.

Rep. Kanjorski made his comments in urging passage of draft legislation that would leave rating agencies independent, but would 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–"The Accountability and Transparency in Rating Agencies Act"–would give the U.S. Securities and Exchange Commission power to dictate how credit rating agencies determine their ratings.

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."

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

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 S&P's 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 said that while rating agencies "expect that some portion of the debt we rate, even highly rated debt, will default," he added that "our ratings of [mortgage-backed securities] 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 S&P would oppose them because they are "problematic, and, in our view, would bring unintended harm to the markets."

Ray McDaniel, chair 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 details to the general public about transaction structures and asset pools.

In his testimony, Mr. McDaniel did support components of the legislation proposed by Rep. Kanjorski that would establish an agency within the SEC 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."