Credit-Rating Agency Heads Get Slapped In Congress
Riaz K Tayob
Shortly after proposing legislation to strengthen SEC oversight of the
credit-rating agencies responsible for measuring the safety of
investment in public companies and securities, lawmakers lashed out at
representatives from the industry who appeared at a House subcommittee
panel Tuesday afternoon.
Since the collapse of Wall Street's financial titans, the largest of
these agencies -- who are paid by the companies they are rating -- have
typically argued that their ratings are mere opinions, neither
statements of fact nor professional judgments. But committee members
said that, since the small group of agencies licensed by the SEC are
implicitly endorsed by the government, that isn't good enough.
"I'm not a professional, but I play one in the marketplace," was New
York Democrat Gary Ackerman's assessment of the familiar argument from
Fitch Ratings CEO Stephen Joynt. "If this is just your opinion, why
don't we just strip away your government license to operate?"
Ackerman, who went on to compare the agency's "opinions" to those of his
cousin Sheldon, joined with Delaware Republican Michael Castle to
sponsor a bill that would give the SEC more authority to shape
securities-rating policy. In the Senate, Rhode Island Democrat Jack Reed
introduced a similar bill Tuesday that would punish conflicts of
interest or malfeasance on the part of credit-rating agencies.
Along with Moody's and Standard & Poor's, Fitch accounts for the bulk of
the $5-billion-a-year credit-rating industry, but Joynt attempted to
distance Fitch from the other two firms as he argued against eliminating
the SEC's license limitations, which he claimed would ironically reduce
the number of rating agencies available to consumers.
"We believe they will default to the largest 'brand name' rating
agencies (Moody's and S&P), which is not a positive if one of your
objectives is increasing competition and thereby fostering a better work
product," Joynt wrote in his prepared remarks. Later, he asked that the
government act in a manner that was "fair and balanced" and not "throw
the baby out with the bathwater."
Just as Joynt tried to draw a line between Fitch and the other two
firms, executives from smaller rating agencies sought to distance
themselves from Fitch. Robert Dobilas, the CEO of the 50-man rating firm
Realpoint, noted that his firm is financed by subscribers rather than
its subjects, just as the Big Three agencies were for their first 75
years in business, and that they perform monthly due diligence reporting
on the agencies they rate.
"They do not have the same philosophy when it comes to surveillance,"
Dobilas said of the Big Three.
Though Joynt disagreed, most of the six panelists assembled for the
hearing said that a combination of funding sources, including investors
and subscribers, would decrease the influence of the parties being
evaluated by rating agencies. Rep. Castle expressed concern that smaller
groups would be harder-pressed to pay for ratings, but appeared visibly
frustrated when Joynt offered no alternatives.
UCLA law professor Eugene Volokh said that if the credit-rating agencies
are basically advertising, such speech is generally held to have a much
lower level of First Amendment protection than newspapers or
ostensibly-independent media. In that case, Congress would face little
legal challenge in restricting their means of funding, Volokh said.
While lambasting Fitch CEO Joynt, Ackerman praised Volokh's assessment.
"Rating agencies are not equal to newspapers," Ackerman said. "Your
industry ... does not have the sense of integrity that these other
industries have."