Congress Urged to Raise Liability Standard for Credit Rating Firms

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Congress must consider radical reforms to improve the accountability and reliability of credit rating agencies like Moody’s Corp. and McGraw-Hill Cos. Inc.’s Standard & Poor’s, a top U.S. lawmaker said Friday.

Representative Paul Kanjorski, a senior Democrat on the House Financial Services Committee, said reforms to promote better ratings quality could include exposing the agencies to greater legal liability.

“We must consider radical reforms aimed at improving accountability, reliability, transparency, and independence,” he said at a hearing on changes to financial regulation.

Talk of further reforms to the industry dominated by Moody’s, Standard & Poor’s and Fimalac’s Fitch Ratings came on the same day that Fimalac said it would sell a 20 percent stake in its Fitch credit rating company to U.S. media company Hearst Corp.

The Obama administration has already proposed changes, including more disclosure, but some lawmakers feel the measures do not go far enough after the agencies assigned top ratings to mortgage-backed securities that later dropped in value, helping to propel the credit crisis.

“By sprinkling their magic dust on toxic assets, rating agencies turned horse manure into fool’s gold,” Kanjorski said at a congressional hearing.

“We therefore should no longer pursue only modest modifications in regulating this problematic industry.”

The administration has shied away from possibly changing the basic business models of the biggest credit rating agencies. They are paid by the banks or issuers whose products they rate.

This “issuer-paid model,” has elicited concern from the head of the Securities and Exchange Commission and lawmakers.

Kanjorski suggested altering that model, but Treasury Secretary Timothy Geithner told Congress he did not see a “practical viable alternative.”

At a committee hearing to examine the Obama administration’s plans to overhaul the country’s regulatory system, Geithner said he was “happy to look at any idea,” including Kanjorski’s reforms on liability standards.

Separately, Democratic Representative Brad Sherman said he would be introducing legislation to have credit rating agencies selected at random from a qualified panel.

Moody’s shares were up 1.1 percent at $25.80 in afternoon trading on the New York Stock Exchange.

(Reporting by Kevin Drawbaugh and Rachelle Younglai; Editing by Neil Stempleman)