Bipartisan Panel Urges SEC to Rank Raters on Performance, Aid Civil Suits

WASHINGTON — The Securities and Exchange Commission should rank nationally recognized credit rating agencies based on performance and should help investors hold them accountable in civil lawsuits over unjustifiable inflated ratings, a bipartisan congressional panel recommended Wednesday.

The majority and minority staff of the Senate Homeland Security Committee’s permanent investigations panel made the recommendations in a 635-page report on the financial crisis called “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.”

While the report, the culmination of a two-year investigation, criticized the rating agencies for their actions regarding mortgage-backed securities and collateralized debt obligations, its recommendations would affect ratings across the financial markets.

The panel recommended the SEC use its regulatory authority to facilitate the ability of investors to hold credit agencies accountable in civil suits for inflated ratings, when they knowingly or recklessly fail to conduct reasonable investigations of rated securities.

The panel found that the most immediate cause of the financial crisis was the July 2007 mass rating downgrades of MBS that exposed the risky nature of the securities, just months after issuing triple-A ratings for them that suggested they were as safe as Treasuries.

The collapse in value devastated investors.

The panel focused on the two largest nationally recognized statistical rating organizations — Moody’s Investors Service and Standard & Poor’s, claiming they issued gilt-edged ratings for MBS and CDOs, then helped build an active market for them.

Internal e-mails showed credit agency employees knew their ratings would not hold and delayed imposing tougher rating criteria to “massage the … numbers to preserve market share,” according to the panel.

Even after they adjusted their risk models to reflect the higher-risk mortgages being issued, the agencies failed to apply the revised models to many existing securities and helped investment banks rush the risky investments to market before the tougher criteria took effect, the report charged.

The rating agencies continued to pull in lucrative fees of up to $135,000 to rate a mortgage-backed security and up to $750,000 to rate a CDO — fees they might have lost if they had angered issuers by providing lower ratings, the panel claimed in its report.

Ultimately, over 90% of the triple-A ratings for MBS in 2006 and 2007 were downgraded to junk status, the report said.

Some of the other actions recommended by the panel are already being implemented. The SEC, which oversees rating agencies, requires them to have internal controls and to monitor and disclose conflicts of interest. The commission also is reducing the federal government’s reliance on ratings in its rules.

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