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Credit Rating Agencies Fight Back in Congress

By Sally Maison
Published: Saturday, October 3rd, 2009

Credit Rating Agencies stood up against a new legislation circulating in Congress today which places greater sanctions on them and bigger penalties.

Credit Rating Agencies Fight Back in CongressRepresentatives from the three biggest nationally recognized statistical rating organizations (NRSRO) attended yesterday a hearing at the US House of Representatives yesterday to express their disappointment over a proposed bill in Congress. Senior firm representatives say that the draft is unreasonable and is by no means fair.

The legislation draft, called the Enhanced Accountability and Transparency in Credit Rating Agencies Act, aims to make NRSROs jointly liable for each other’s mistake. If passed, complainants can already claim penalties from any NRSRO regardless of made the mistake in credit scoring. The proposed act would also mandate scoring firms to provide each other with any information that formed the basis of their ratings.

President of Standard & Poor’s says that the proposed legislation is inappropriate and unfair. Another senior representative from a rating firm commented that a bill which will diminish their status as nationally recognized raters is contradictory. He says that it will only increase liability and costs while taking away a significant recognition from them. Fitch Group also noted another contradiction. The bill, which intends to make rating methodologies uniform and consistent, also suggests firms to adopt different ciphers whenever the Securities and Exchange Commission deems it necessary.

The arguments of credit rating firms are backed by New Jersey Republican Scott Garrett who believes that other means could be used to reform credit scoring practices. He questions the proposed bill’s practicality as well as its constitutionality. He says that more lawsuits will not solve scoring problems and making all NRSROs liable for the mistake of one will not do any good.

The legislation was passed after several members of the House of Representatives noted that mistakes in credit rating firms cost companies and municipalities significant amounts. A testimony from a former NRSRO employee which claims that his company place more importance on profit that fairness also spurred the proceedings. The former managing director for Moody’s likewise claimed that the company pressures employees to cooperate with their scheme.

Meanwhile, industry analysts say that NRSROs may find it difficult to regain public trust. Experts pointed out that rating firms rely heavily on their reputation in order to publish credible scores and a tarnished name might take long to rebuild. However, some specialists believe that scoring firms are still regarded by corporations as credible as before. At present, there are 10 NRSRO members including Moody’s Investor Service, Fitch Ratings, and Standard & Poor’s.

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