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Ratings Agencies Could Face New Regs

The House Oversight committee just wrapped up a grueling five-hour hearing that took on the credit-ratings agencies for their role in the ongoing financial crisis.

As scintillating as that first sentence is, rest assured that a) actual sparks flew and b) this is pretty important stuff.

When investors feel they can't trust anyone else, they turn to the ratings agencies to tell them what's a solid bet and what's not. Brokers push stocks on you hoping for sales commissions, but ratings agencies are supposed to be neutral and impartial, implicitly on your side. So when they say a bond is rated AAA, you should consider it a solid investment.

Today's hearing showed that's not always true.

The hearing, which concluded with a grilling of the heads of the Big Three rating agencies -- Moody's, Standard & Poor's and Fitch -- showed that each competes vigorously with the other to get business and -- because everything they do is based on opinions -- some are willing to be a little more slack with their opinions to win business.

All three top executives -- Moody's Ray McDaniel, S&P's Deven Sharma and Fitch's Stephen Joynt -- said they didn't see the collapse of the housing bubble coming. Which is why they gave high ratings to mortgage-backed securities we now know to have been based on lousy mortgages headed straight to default from the moment they were signed on the bottom line.

And, to an extent, that's fair. Almost no one saw it coming.

But there wasn't a lot of love in the hearing room today for the Big Three, as they weathered withering attacks from Oversight committee chairman Rep. Henry Waxman (D-Calif.) and fellow members.

As predicted here earlier, when S&P's Sharma mentioned an "internal review" that found S&P had done nothing wrong, Waxman hit that out of the park like the Phillies's Ryan Howard turning on a lazy curve.

"It’s hard to find misconduct if there’s no standard for misconduct," Waxman said.

Rep. Christopher Shays (R-Conn.), joined Waxman in a concluding assault on the executives.

"I think you've lost your brand," Shays said. "You have no credibility. You have so screwed up the ratings as to [make them] not be believable anymore."

Shays then asked each of the three: "Do you agree with that?"

"Absolutely," Sharma said. "We have to earn our credibility back."

"Our reputation has been damaged," Joynt offered.

"I think there has been situational damage," McDaniel said.

"Serious or just a little?" Shays continued.

"Serious in the areas that have been under stress," McDaniel allowed.

The witnesses didn't receive the level of vitriol usually reserved for oil barons after they report record profits -- when lawmakers' questions essentially can be translated as: "If this were 200 years ago, we'd have lighted torches and pitchforks." -- but no one got off easy today, least of all Moody's McDaniel.

And don't be surprised if the rating agencies end up operating under more or tougher regulations in the wake of this crisis.

--Frank Ahrens

By Frank Ahrens  |  October 22, 2008; 3:48 PM ET
Categories:  The Ticker  
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