Dem Lawmaker Hits Credit Rating Firms With Collective Liability, Sparking Industry Protest

October 1, 2009

(ChattahBox)— Congressional lawmakers yesterday, focused on the much needed overhaul of the credit rating agencies, which played a major role in the collapse of the overrated subprime mortgage securities that caused the economic crisis last fall.

Rep. Paul Kanjorski (D-PA) proposed a bill to address the accountability problems of the ratings agencies, by imposing collective liability for any improper ratings issued by competitor agencies.

Predictably, the top credit agencies and many Republicans on the House Financial Services subcommittee strongly objected to Kanjorski’s bill, which would force rating agencies to collectively self-police one another, as an industry, or suffer the consequences.

Kanjorski, chairman of the House Financial Services subcommittee, believes that imposing collective liability on the agencies would provide a powerful incentive to issue accurate ratings. His bill would force rating agencies “to police one another and release reliable, high-quality ratings” said Kanjorski.

The big three credit agencies, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings complained that Kanjorski’s bill would trigger scores of costly lawsuits and reduce competition in an industry already lacking in competition, beyond the big three rating firms.

Raymond McDaniel, chairman and CEO of Moody’s Corp expressed concern that imposing collective liability would spur lawsuits by unhappy investors and investment firms.

Kanjorski described his bill as “the start of a process” to implement President Obama’s proposals to reform the nation’s financial sector and impose increased regulatory oversight on the rating industry.

Whatever changes are ultimately agreed upon, the goal of reforming the ratings industry is to address the conflict of interest problems, where firms that issue securities, pay the agencies for ratings of those securities, leaving investors out of the process.

In a one two punch aimed at the credit ratings industry yesterday, additional misconduct hearings were held by the Oversight and Government Reform, where two former Moody’s executives testified, making allegations of inflated ratings, conflicts of interest and the lack of surveillance of municipal securities.

Moody’s Chief Credit Officer Richard Cantor denied the former employees’ allegations, only acknowledging that his agency firm innocently misjudged the extent of the subprime mortgage disaster.

Former employee Eric Kolchinsky, worked for Moody’s as a managing director and testified that Moody’s violated securities laws by fraudulently issuing credit ratings the firm knew to be inaccurate.

Scott McCleskey, a former senior vice president for compliance at Moody’s, alleged a “lack of meaningful surveillance of municipal securities, contrary to statements by Moody’s to the public and to Congress.”

SEC spokesman John Nester, said that the agency was made aware of the former employees’ complaints “…and took the appropriate action.”


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