WASHINGTON BUREAU — A House Financial Services subcommittee chairman today charged that the rating agencies betrayed "their special status under our laws" through a "ask me no questions, I'll tell you no lies" approach to grading mortgage-backed securities.
Rep. Paul Kanjorski, D-Pa., head of the Capital Markets Subcommittee, made those comments while urging passage of a draft bill that would preserve credit rating agency independence but require the agencies to comply with standards they create and police themselves.
The Accountability and Transparency in Rating Agencies Act bill draft would give the U.S. Securities and Exchange Commission power to dictate how credit rating agencies determine ratings.
At the hearing, rating agency representatives acknowledged that their firms' ratings performed poorly, and they said they would support many of the reforms proposed in the ATRAA draft.
But the rating agencies said they would oppose some provisions, including one that would making the rating agencies responsible for each others' ratings through collective liability.
"This reform will hopefully incent participants in this oligopoly to police one another and release reliable, high quality ratings," Kanjorski said in support of the provision. "This reform, however, is not the only way to fix this problem, and I am open to other ways to achieve this objective."
Kanjorski said he is seeking bipartisan support for the ATRAA bill and that he would like his subcommittee to discuss and vote on the bill soon, hopefully by mid-October.
Devon Sharma, president of Standard & Poor's Ratings Services, New York, said his company would support most of the ATRAA provisions proposed by Kanjorski in the discussion draft and would provide details about its concerns in coming weeks.
"S&P is profoundly disappointed with the performance of many of its ratings on" MBS securities, Sharma said.
The rating agencies "expect that some portion of the debt we rate, even highly-rated debt, will default," Sharma said. But "our ratings of MBS in this time period have been unusually unstable and their performance has not matched our historical record."
But, Sharma said, changes to federal securities laws that would treat rating agencies "far more harshly than other defendants in securities fraud lawsuits," and others that would interfere with rating agencies' "analytical independence," will be opposed because they are "problematic, and, in our view, would bring unintended harm to the markets."
Ray McDaniel, chairman of Moody's Investors Service, New York, said some of the proposed ATRAA 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 and require the companies issuing the information to give the general public more information about transaction structures and asset pools.
In his testimony, McDaniel did support components of the ATRAA draft that would establish an agency within the SEC to oversee the credit rating industry, as well as provisions giving the SEC the authority to undertake enforcement actions against rating agencies that fail to comply with regulatory requirements.
Moody's also would support provisions of the proposed bill that would require rating agencies to establish governance standards "to appropriately manage conflicts of interest," McDaniel said.
Although Moody's already has such a policy in place, a conflict-of-interest management requirement will "help restore confidence in our industry by ensuring that all rating agencies are subject to enhanced regulatory oversight," McDaniel said.
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