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The New York Times > Log In
Debt Raters Avoid Overhaul After Crisis
What explains the timidity of Congress’ proposals? This is not a case of lobbyists beating back ideas that might hurt their clients, say those close to the discussions. Instead, Congress is worried that bold measures may backfire. The Big Three, by allowing companies and public entities to raise money by issuing debt, are an essential engine in the country’s vast credit factory, and given the still-fragile condition of the equipment, lawmakers are reluctant to try anything but basic repairs, patches and a new alarm system.
In addition, legislators say, there is little consensus about what a top-to-bottom renovation should look like.
Under bills that legislators are currently considering, the rating agencies will have to contend with greater oversight, stiffer rules about disclosure and a provision that would make it easier for plaintiffs to sue the firms. But nothing in the laws tackles the critic-for-hire problem or threatens the 85 percent market share that Moody’s, S.& P. and Fitch now enjoy.
Evaluating Risk If Congress Fails to Act on Ratings Agency Reform
Given tough talk from Congressional leaders about the need for sweeping financial regulatory reforms, bills under consideration by the House and Senate in at least one key area – oversight of the credit rating agencies -- do not appear to require wholesale changes in the way the agencies operate. And regardless of what the proposals actually contain action on any of them remains a question mark.
The integrity of credit ratings – which are used to evaluate the risk of an investment -- is vital to the operations and bottom lines of securities firms, since industry rules set floors on the quality of their investments. These floors have historically been defined by the credit rating agencies, and their ratings are used as a reference point in a number of Securities and Exchange Commission (SEC) rules. The ratings are also key inputs into systems used by securities buyers, to evaluate and manage risks.
In the Senate, the focus is on the overhaul package introduced by Senate Banking Committee Chairman Christopher Dodd, D-CT. The bill remains under consideration by the committee, with sections of the legislation assigned to various committee members. The credit rating agency section is being handled by Senators Jack Reed, D-RI, and Judd Gregg, R-NH.
In the House, the Accountability and Transparency in Ratings Agencies Act, introduced by Paul Kanjorski, D-PA, passed the House Financial Services Committee on October 28.
Some of the most talked-about reforms – such as collective liability – are not making it beyond discussion drafts. On the House side, Kanjorski, chairman of the capital markets subcommittee of the House financial services committee, had proposed 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,” he said at a September 30 hearing.
But following industry opposition, the provision was dropped. In Congressional testimony, Moody’s CEO Raymond McDaniel argued that exposing the agencies to such liability could result in a significant increase in threatened and actual litigation, “much of it driven by mere disagreement with rating opinions.”
Moody’s supports other parts of the legislation, however, including establishing an office within the SEC to oversee the credit rating industry, and requiring all Nationally Recognized Statistical Rating Organizations (NRSROs) to establish governance procedures to manage conflicts of interest. “This requirement will help restore confidence in our industry by ensuring that all NRSROs are subject to enhanced regulatory oversight,” McDaniel told the committee.
NRSROs are credit rating agencies that are registered with the Securities and Exchange Commission (SEC). Ten firms are currently registered; the three largest are Moody’s Investors Service Inc., Standard & Poor’s Rating Services, and Fitch Inc.
The New York Times > Log In
Debt Raters Avoid Overhaul After Crisis
What explains the timidity of Congress’ proposals? This is not a case of lobbyists beating back ideas that might hurt their clients, say those close to the discussions. Instead, Congress is worried that bold measures may backfire. The Big Three, by allowing companies and public entities to raise money by issuing debt, are an essential engine in the country’s vast credit factory, and given the still-fragile condition of the equipment, lawmakers are reluctant to try anything but basic repairs, patches and a new alarm system.
In addition, legislators say, there is little consensus about what a top-to-bottom renovation should look like.
Under bills that legislators are currently considering, the rating agencies will have to contend with greater oversight, stiffer rules about disclosure and a provision that would make it easier for plaintiffs to sue the firms. But nothing in the laws tackles the critic-for-hire problem or threatens the 85 percent market share that Moody’s, S.& P. and Fitch now enjoy.
Evaluating Risk If Congress Fails to Act on Ratings Agency Reform
Given tough talk from Congressional leaders about the need for sweeping financial regulatory reforms, bills under consideration by the House and Senate in at least one key area – oversight of the credit rating agencies -- do not appear to require wholesale changes in the way the agencies operate. And regardless of what the proposals actually contain action on any of them remains a question mark.
The integrity of credit ratings – which are used to evaluate the risk of an investment -- is vital to the operations and bottom lines of securities firms, since industry rules set floors on the quality of their investments. These floors have historically been defined by the credit rating agencies, and their ratings are used as a reference point in a number of Securities and Exchange Commission (SEC) rules. The ratings are also key inputs into systems used by securities buyers, to evaluate and manage risks.
In the Senate, the focus is on the overhaul package introduced by Senate Banking Committee Chairman Christopher Dodd, D-CT. The bill remains under consideration by the committee, with sections of the legislation assigned to various committee members. The credit rating agency section is being handled by Senators Jack Reed, D-RI, and Judd Gregg, R-NH.
In the House, the Accountability and Transparency in Ratings Agencies Act, introduced by Paul Kanjorski, D-PA, passed the House Financial Services Committee on October 28.
Some of the most talked-about reforms – such as collective liability – are not making it beyond discussion drafts. On the House side, Kanjorski, chairman of the capital markets subcommittee of the House financial services committee, had proposed 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,” he said at a September 30 hearing.
But following industry opposition, the provision was dropped. In Congressional testimony, Moody’s CEO Raymond McDaniel argued that exposing the agencies to such liability could result in a significant increase in threatened and actual litigation, “much of it driven by mere disagreement with rating opinions.”
Moody’s supports other parts of the legislation, however, including establishing an office within the SEC to oversee the credit rating industry, and requiring all Nationally Recognized Statistical Rating Organizations (NRSROs) to establish governance procedures to manage conflicts of interest. “This requirement will help restore confidence in our industry by ensuring that all NRSROs are subject to enhanced regulatory oversight,” McDaniel told the committee.
NRSROs are credit rating agencies that are registered with the Securities and Exchange Commission (SEC). Ten firms are currently registered; the three largest are Moody’s Investors Service Inc., Standard & Poor’s Rating Services, and Fitch Inc.
