By Silla Brush - 09/30/09 11:23 PM EDT
House lawmakers on Wednesday vowed to pass new restrictions on credit rating agencies and expand an investigation into an industry that fueled the financial crisis with favorable reviews of risky products.
The credit rating agencies — particularly Moody’s, Standard & Poors and Fitch — came under fire from lawmakers for operating a system with inherent conflicts of interest. Issuers of financial products pay the ratings firms for reviews of their products, and many of the riskiest assets in the financial crisis received top ratings from the industry.
A former Moody’s employee, Eric Kolchinsky, contacted the SEC with concerns about misleading business practices at the firm, according a memo prepared by committee Republicans. But SEC officials did not respond to Kolchinsky’s concerns, according to the memo. Another former Moody’s employee testified about misconduct in the ratings industry.
“It looks like not much has changed since the crash of 2008,” said Rep. Edolphus Towns (D-N.Y.), the panel’s chairman. He said the committee intends to continue pursuing the issue.
The concerns about the SEC come as Congress debates granting new powers to the same agency to oversee credit ratings firms. The new powers and debate over the industry is one part of a series of changes the Obama administration has proposed to revamp financial regulations.
“The SEC has established an examination program for credit rating agencies registered with the Commission,” said John Nester, a spokesman for the SEC.
“We are focusing carefully on the tips and complaints we receive and following-up, where appropriate, with examinations targeting suspected problems.”
In the thick of the crisis, ratings firms were forced to downgrade many of the securities and financial products based on troubled home loans. Those downgrades spurred the broader crisis by calling into question the value of many of the loans and securities held by banks and oth er investors around the world.
Rep. Paul Kanjorski (D-Pa.) is spearheading the effort in the House and has circulated draft legislation that would give new oversight powers to the SEC and require further disclosures about how issuers of securities pay for ratings.
House Republicans on the Oversight Committee said in their memo that the SEC’s lack of response to the Moody’s employee “raises serious questions” about granting the agency new powers.
Kanjorski’s bill also goes further than the Obama administration — which proposed changes to the industry earlier this year — by increasing new liabilities for ratings firms. Kanjorski supports a system of collective liability for the industry that would encourage the biggest firms to police each other.
Raymond McDaniel, chief executive of Moody’s, said in testimony on Wednesday that he supports the creation of an office at the SEC to oversee the industry. But McDaniel raised concerns, particularly over the issue of new liability standards.
“Under the existing law, there is already substantial accountability,” he said, adding that “greater liability is likely to result in a significant increase in threatened and actual litigation, much of it driven by mere disagreement with rating opinions.”