Rating agencies under fire on Capitol Hill

Lawmakers on Wednesday fiercely criticized the nation’s top credit-rating agencies for their role in the financial crisis, revealing internal company documents showing that employees were concerned about their firms' ratings. 

“The story of the credit-rating agencies is a story of colossal failure,” said Rep. Henry Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform. “The result is that our entire financial system is now at risk.”

{mosads}Executives of Moody’s Corporation, Standard & Poor’s, and Fitch Ratings told Congress that they could not have accurately predicted the severity of the subprime crisis.

“We did not foresee the magnitude or velocity of the decline in the U.S. housing market,” said Stephen Joynt, chief executive of Fitch.

“We recognize that many of the forecasts we used in our ratings analysis of certain structured finance securities have not been borne out,” said Deven Sharma, president of Standard & Poor’s.

Internal documents obtained by the committee show company employees, outside investors and top officials were all concerned about the direction of the industry and their ability to accurately value complex financial products at the heart of the crisis. Many of those were once highly rated but later turned out to be much riskier.

Competition among the rating agencies for Wall Street business “penalizes quality,” Moody's CEO Ray McDaniel said a year ago, according to documents Waxman obtained. “Unchecked, competition on this basis can place the entire financial system at risk.”

In a transcript of a town hall meeting in 2007 with his managing directors, McDaniel said his agency faced a “dilemma” and a “very tough problem,” and described a “slippery slope” within the industry for grading investments.

“Everything was investment-grade,” he said, referring to high credit ratings. “It didn’t really matter …”

An analyst at Standard & Poor’s called the agency’s ratings for collateralized debt obligations, a collection of different mortgage securities, an “even bigger monster.”

“Let’s hope we are all wealthy and retired by the time this house of cards falters,” the analyst wrote.

McDaniel said Moody’s ratings “are not influenced by commercial consideration. Our ratings are the basis of best opinion at the time.”

Meantime, Sharma testified that Standard & Poor’s is working to improve its rating process and makes its methods open to the public.