- The Washington Times - Wednesday, April 23, 2008


The Securities and Exchange Commission is considering new rules to limit conflicts of interest in the credit rating industry, a key financial player under scrutiny for not sounding the alarm about risky mortgage investments soon enough.

SEC Chairman Christopher Cox said at a hearing yesterday of the Senate Committee on Banking, Housing and Urban Affairs 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 Mr. 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 past 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 yesterday that the government should suspend credit rating agencies’ government licenses if they consistently give ratings that turn out to be inaccurate.

Sen. Richard C. Shelby of Alabama, the committee’s senior Republican, compared the rating agencies to doctors. “If they’re incompetent, they jerk their licenses,” Mr. 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.

Mr. 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 have already found several cases in which rating agencies failed to disclose conflicts of interest, some as recently as this year, Mr. Cox said.

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