S&P controversy fuels demands for ratings reforms
Concerns about S&P's downgrading of the U.S. credit rating and the resulting global stock sell-off are sparking urgent calls for investigations and reinvigorating ongoing efforts to reform the ratings agencies, which have been under fire since the Enron scandal of 2001.
Representative Maxine Waters, a California Democrat, on Wednesday called for the House Financial Services Committee to hold a hearing on the implications of the S&P downgrade.
She also wrote to the Securities and Exchange Commission, asking it to investigate whether Standard & Poor's, a unit of McGraw Hill, selectively disclosed information about a downgrade of U.S. government debt to certain financial institutions before it was publicly released.
Waters said she was concerned by news reports that banking industry executives met with S&P on Thursday and Friday, before the downgrade, especially given heavy trading volumes and a large sell-off of equity securities during the day on Friday before S&P formally announced the news on Friday evening.
S&P declined comment.
The Senate Banking Committee has also said it is looking into the S&P downgrade.
John Hunt, a law professor at the University of California Davis, noting that the S&P downgrade was prompting even more anger than the 2008 housing crisis, particularly given allegations by the Treasury that the company based its decision in part on a $2 trillion error.
S&P denies it made an error but acknowledged it later changed its assumptions.
This is definitely reenergizing the debate, he said.
There may well be some more pressure on the regulators to do what they were ordered to do, he said.
The Enron debacle spurred measures to remove barriers to competition in the ratings industry, allowing smaller companies to make gains in a market still largely dominated by S&P, Moody's Corp and Fimalac SA's Fitch Ratings.
Credit rating agencies have been criticized for fueling the 2007-2009 financial crisis by assigning gold-plated ratings to securities that proved to be far more risky than advertised.
In response, the 2010 Dodd-Frank financial oversight law requires regulators to strip from their regulations the reliance on credit rating agencies' work to determine such things as capital requirements for banks based on the riskiness of their assets.
Hunt said regulators have been resisting those measures and have already missed a deadline for completing that work.
Reforms have also not yet fully tackled the issuer pays problem -- namely that potential borrowers pay the ratings agencies to grade their creditworthiness, something critics say results in clear conflicts of interest.
Senator Al Franken, a Minnesota Democrat, who spearheaded a drive to eliminate the conflict of interest, told Reuters on Wednesday that he has already been on the phone with very high administration officials to raise his concerns about the S&P downgrade and to revive his reform efforts.
Franken, whose proposed amendment to the 2010 Dodd-Frank financial reform bill would have created a new board to assign initial ratings contracts to the agencies instead of letting borrowers pick a firm themselves, says he remains fully engaged.
A weakened version of the measure was adopted in the final bill that requires the SEC to address conflicts of interests at the agencies and implement the new board by mid-2012 if no alternative emerged from a two-year study.
Columbia University law professor John Coffee said concerns about the downgrade could spur fresh interest in reforms, but if history was any guide, any changes were likely to face resistance from the industry and even regulators.
A wide range of groups, companies and lawmakers responded this past week to a 517-page proposal unveiled by the SEC in May that mapped out rules to improve the quality of ratings agencies and implement the Dodd-Frank law.
Democrat Carl Levin, chairman of the Senate's Permanent Committee on Investigations, urged the SEC to beef up its proposed rules, saying they were critical to ensuring accurate ratings and the return of investor confidence.
Meanwhile, S&P, Moody's and Fitch submitted dozens of pages of detailed comments, urging the SEC to alter and back off some key proposals.
The ratings industry is also continuing to fight a measure in Dodd-Frank that made it easier for investors to sue credit rating agencies that overlook key information.
So far this year, the big three companies have spent well over $1 million combined to lobby Congress, a fact that prompted government watchdog group Public Citizen to call for a ban on lobbying by the groups given their power over government agencies whose creditworthiness it rates.
Former congressman Lee Hamilton, director of the Center on Congress at Indiana University, said the American public was angry at the ratings companies and the financial industry.
He said a ban on lobbying would infringe on the companies' First Amendment rights, but argued that lobbying activities should be more fully disclosed than they are now.
(Additional reporting by Sarah N. Lynch)
(Reporting by Andrea Shalal-Esa)
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