AP
By Alan Zibel, AP Business Writer
SEC Chairman Christopher Cox said at a Tuesday hearing of the Senate Banking Committee that the government may soon create rules to ban credit rating agencies from doing consulting work for issuers of debt.
The regulations haven't been developed yet, but Cox told lawmakers that he saw no reason why such work "could not be prohibited."
The industry, dominated by Standard & Poor's, Moody's Investors Service and Fitch Ratings, has been roundly criticized for failing to accurately assess -- and warn investors about -- the risks that mortgage investments posed to financial markets. The credit crisis has led to more than $200 billion in write-downs taken by banks and financial firms over the last year.
Critics say the agencies are vulnerable to conflicts of interest because they are paid by the companies whose bonds they rate. In response, agencies say they are strengthening protections against conflicts. For example, S&P says it is establishing an ombudsman's office.
However, only Fitch sent its chief executive to the hearing, which irked several lawmakers. The other two sent less-senior executives to Capitol Hill.
Senators suggested Tuesday that the government should suspend credit rating agencies' government licenses if they consistently give ratings that turn out to be inaccurate.
Sen. Richard Shelby of Alabama, the committee's senior Republican, compared the rating agencies to doctors. "If they're incompetent, they jerk their licenses," Shelby said, adding that by being "consistently wrong" on mortgage investment risks, credit rating agencies have contributed greatly to the financial debacle we have today."
Cox told lawmakers that the SEC plans to issue a report by early summer on the rating agencies, focusing on how they managed conflicts of interest and whether they gave too-high ratings for risky investments.
The SEC, which has assigned about 40 staff members to look at rating agency activities, is reviewing hundreds of thousands of pages of rating agency records and e-mail messages.
They've already found several cases in which rating agencies failed to disclose conflicts of interest, some as recently as this year, Cox said.
In 2006, President Bush signed a bill designed to encourage the SEC to allow more competitors in the field and to boost government oversight of the credit rating agencies. The agency is developing rules to expand oversight of the agencies under that law.
Cox said the industry was hampered by a lack of competition among rating agencies, but expressed hope that increased competition in the industry -- as encouraged by the 2006 law -- would improve the quality of ratings.
He also said the SEC's new rules may require the rating agencies to disclose detailed information about mortgage assets that underpin the securities they rate.
Rating agencies have downgraded thousands of mortgage-linked securities over the past nine months, as U.S. mortgage delinquencies have soared and the value of those investments plummeted.
Executives at S&P, Moody's and Fitch said they are cooperating with the SEC to improve the quality of their analysis and have changed numerous business practices in response to the mortgage mess.
Fitch's chief executive, Stephen Joynt, acknowledged his company's failure to anticipate housing and mortgage market problems.
"It will be a long and difficult road to win back market confidence," Joynt said.
Separately, the Securities Industry and Financial Markets Association, Wall Street's biggest lobbying group, said Tuesday it formed a task force to look at credit rating issues and will exam the current model in which debt issuers pay for ratings.
The task force is being led by Boyce Greer, president of the fixed income and asset allocation division at Boston-based mutual fund operator Fidelity Investments, and Deborah Cunningham, chief investment officer at Pittsburgh-based Federated Investors Inc.
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