WASHINGTON - Executives from major credit rating agencies were accused yesterday by senators of being hampered by conflicts of interest that may have contributed to the worldwide mortgage market turmoil.
The biggest rating agencies - Standard & Poor's, Moody's Investors Service, and Fitch Ratings - are under fire from critics who say they failed to give investors adequate warning of the risks associated with mortgage-backed securities. Those investments are now plummeting in value as home-loan defaults soar, particularly among borrowers with weak, or subprime, credit histories.
Several members of the Senate Banking Committee questioned rating agency executives about whether they provided advice to investment banks that issue complex mortgage securities tied to subprime home loans.
"It seems to me that credit rating agencies are playing both coach and referee," said Senator Robert Menendez, a New Jersey Democrat.
The rating agencies' seal of approval effectively concealed the true risks of those investments, lawmakers said, comparing the agencies' lack of foresight about the risks inherent in the subprime mortgage market with their failure to anticipate the collapse of Enron Corp. and WorldCom.
Senators were particularly concerned with a key aspect of the agencies' business models: They get paid by the companies whose bonds they rate. That's like a film production company paying a critic to review a movie, and then using that review in its advertising, said Senator Jim Bunning, Kentucky Republican.
Officials from S&P and Moody's Corp. said their methodology for monitoring risk of mortgage-backed bonds was sound, but vowed improvement.
Vickie Tillman, executive vice president of credit market services for S&P, a subsidiary of McGraw-Hill Cos., said there is no collaboration between S&P and investment banks that issue debt, but acknowledged that the agency has an "open dialogue" with sellers of mortgage securities.
The Securities and Exchange Commission has been examining whether the rating agencies were prodded by investment banks to publish higher ratings for mortgage securities, chairman Christopher Cox said. The agencies are subject to SEC oversight enacted last year amid a push to encourage more competition in the ratings business.
Source: Associated Press