Congress, Insurance Regulators Seek Answers from Ratings Firms

By | September 24, 2009

A U.S. House panel abruptly postponed a hearing into accusations that Moody’s Corp. knowingly issued incorrect ratings after Republicans demanded more time to review a whistleblower’s complaint.

Democratic leaders of the House Oversight and Government Reform Committee had planned to spotlight allegations by the whistleblower that Moody’s was too eager to assign high ratings to products, even over objections of its own analysts.

Lawmakers have held a series of hearings over the past year examining how the credit rating industry fueled the financial crisis by assigning high ratings on toxic mortgage-backed securities that later deteriorated in value.

Former Moody’s Managing Director Eric Kolchinsky said in prepared testimony obtained by Reuters that senior managers at the company continued to favor revenue over ratings quality and were willing to dismiss or silence employees who disagreed with them.

Kolchinsky also said Moody’s credit policy group was weak and short-staffed, and analysts were “bullied” by managers who overrode their decisions to generate revenue.

Shares of Moody’s fell 4.4 percent to close at $19.58 in Thursday trading on the New York Stock Exchange.

The hearing was halted when indignant Republicans said they had not received a 14-page memo written by Kolchinsky until minutes before the hearing began.

“We wanted to give adequate time … to digest the new information,” a spokesman for the panel’s top Republican, Rep. Darrell Issa, told reporters. “We want to have a fair hearing. We want to hear from everyone.”

The hearing was rescheduled for next Wednesday, Sept. 30.

WHISTLEBLOWER SUSPENDED
Kolchinsky’s prepared testimony said Moody’s suspended him because of a warning he sent the company’s compliance group about what he believed to be a securities violation.

That warning memo accused Moody’s of knowingly issuing incorrect ratings and was submitted to the oversight committee at least two weeks ago, a source familiar with the matter told Reuters.

The contents of the memo were not made public.

Committee Chairman Edolphus Towns, a Democrat, said he invited Moody’s to testify on Thursday but the company chose not to not send a representative.

“We want to give Moody’s an opportunity to come. Maybe they want to rethink this and come in,” Towns told reporters.

In a statement, Moody’s said it had participated in numerous Congressional hearings and will “respectfully consider any request to appear at the rescheduled hearing.”

The New York-based firm initially declined to attend a separate conference on Thursday in neighboring Maryland, held by state insurance regulators to discuss improving the ratings process. Moody’s later reversed the decision and sent a representative.

Moody’s stock has suffered more than rivals McGraw-Hill’s Standard & Poor’s and Fimalac SA’s Fitch Ratings as regulators and lawmakers step up their scrutiny of the industry.

Since the beginning of September, Moody’s shares have dropped 25 percent, McGraw-Hill is down 23 percent and Fimalac is up 1.4 percent.

Senator Jack Reed has introduced a bill that would make it easier for investors to sue credit agencies that recklessly fail to review key information in developing a rating.

INSURANCE WATCHDOGS CONSIDER CHANGES
At the gathering of insurance commissioners, alternatives were suggested to the dominant ratings firms, including a nonprofit ratings agency, or having the National Association of Insurance Commissioners compile its own ratings.

The insurance industry is the largest U.S. financial service sector that uses credit ratings, according to the NAIC.

“It was disappointing not to hear the rating agencies offer more reflection on their failures,” said Michael McRaith, a member of the NAIC’s working group and the Illinois insurance director.

New York Insurance Superintendent James Wrynn said the group is looking at how rating agencies are paid and stopping issuers from shopping around for the highest ratings.

(Reporting by Rachelle Younglai; Additional reporting by Lisa Lambert; Editing by Tim Dobbyn)

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