- Associated Press - Monday, August 1, 2011

The three major credit rating companies poised to decide whether to downgrade the nation’s top-ranked debt standing are at the same time spending hundreds of thousands of dollars to lobby the Obama administration and Congress over the way the government regulates them.

Moody’s, Fitch Ratings and Standard & Poor’s, along with its parent company, McGraw-Hill, have spent a combined $1.76 million since January to lobby Congress and federal agencies, much of it aimed at new regulations.

The rules are part of the massive Dodd-Frank bill overhaul of the financial industry that Congress passed last year, and federal agencies are still midway through rewriting many regulations to conform to the new law.

Even as the rating companies lobbied, they have repeatedly warned that a failure by the White House and Congress to raise the nation’s $14.3 trillion debt ceiling could force them to lower the high-level AAA ratings that U.S. Treasury bonds have long held. Even with a tentative deal to avert default within reach, rating analysts could still slash U.S. credit values if they are dissatisfied with the details, a move that could shake the financial system.

Critics worry about the potential for conflicts of interest posed by the firms’ dual lobbying and rating roles.

“It’s pretty obvious that the current system is imperfect and has conflicts of interest built in,” said David Dapice, an associate professor of economics at Tufts University who said he is skeptical that recent government reforms aimed at the industry will be effective.

Rating industry officials and lobbyists counter that the companies are exercising their right to weigh in on legislation targeting them in recent years — first, for failing to warn about the 2001 collapse of the Enron energy company and then for missing mortgage banking abuses that led to the deep 2008 recession. Executives also say that strong internal reviews and firewalls insulate their analysts from their Washington dealings.

None of the lobbying firms would discuss their work, but one top lobbyist working for Moody’s dismissed the notion that rating agencies’ pending decisions on U.S. credit would bleed into their dealings with the government.

“You have to operate on the premise that over time, the accuracy of their evaluations will show that the process is above board,” said former U.S. Rep. Vic Fazio, California Democrat and now a senior lobbyist at Washington-based Akin-Gump.

In testimony last week to a House committee, senior executives from S&P and Moody’s said their rating decisions are buttressed by the growing use of internal review panels, conflict-of-interest scrutiny and rotation of analysts.

Deven Sharma, S&P’s president, noted the firm’s “added checks and balances,” while senior Moody’s executive Michael Rowan touted his company’s “bolstering measures to mitigate conflicts of interest.”

Some former industry officials have questioned whether those internal measures are effective. In testimony to the House Oversight Committee in 2009, former Moody’s Investors Service Managing Director Eric Kolchinsky said that compliance groups set up to deal with conflicts were often understaffed and inexperienced.

David Wyss, former chief economist at S&P and now a visiting fellow at Brown University, said his former firm tried hard to minimize conflicts. But “there’s no way to have a complete firewall unless you keep people from reading the newspaper.”

Federal lobbying records show lobbying by McGraw-Hill, Moody’s and Fitch has grown steadily since the mid-2000s as their ratings operations have come under increasing federal scrutiny. In 2005, the three firms spent at least $2.1 million total on lobbying. By 2010, it was $3.6 million.

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