Debt-Rating Firms Resist Prospect of More Supervision

Sen. Paul Sarbanes (D-Md.) raised questions about credit raters consulting for companies they assess. (Chris Kleponis -- Bloomberg News)

The big three credit-rating companies said in a congressional hearing yesterday that they welcome more competition, but stopped short of agreeing to more federal oversight, as members of the Senate Banking Committee raised concerns about conflicts of interest and other questions about the industry.

Raymond W. McDaniel Jr., president of Moody's Investors Service, said he would not oppose giving up his firm's national designation, which the Securities and Exchange Commission granted in 1975. The presidents of Standard & Poor's and Fitch Ratings said they would support an SEC process that allows competitors to obtain the national designation. But Kathleen A. Corbet, S&P's president, said it is "imperative" that regulators "avoid overly intrusive supervision."

The SEC created the national designation, called a Nationally Recognized Statistical Rating Organization, in 1975 to help investment firms assess the quality of their bonds. But the SEC initially gave the national designation only to Moody's, S&P and Fitch without explicit rules about how other rating companies could apply for the designation and without significant regulatory oversight. Since then, investors have come to view the national designation as the U.S. government's stamp of approval, which rivals say has created a de facto oligopoly.

Several senators said the lack of competition is compounded by potential conflicts. The major credit raters receive the bulk of their revenue from the fees they charge to the companies they are rating.

Rating firms also have begun offering consulting services to the companies whose bonds they rate. Some senators compared that to the controversy over auditors who sold consulting services to their audit clients. Sen. Paul S. Sarbanes (D-Md.), the banking committee's ranking Democrat, said, "I don't understand why you'd get any consulting fees," given the potential conflict. Other senators raised questions about another potential conflict involving Moody's board members who also are directors of companies that the service rates.

Sen. Richard C. Shelby (R-Ala.), the committee chairman, said he will ask SEC Chairman William H. Donaldson to testify before the panel in the coming months to explain what action it may take.