Congress Pounds Rating Agencies, Will SEC Be Forced to Act

Implications: The credit rating agencies, Moody's, Standard and Poors, and Fitch, have become the focus of Congress ire over the subprime mortgage problems.  If Congress enacts remedial legislation, it will no doubt affect the bottom line for these companies.  A more likely outcome will be that the SEC will feel the pressure to take regulatory action, and their rules could also require the credit rating agencies to alter their current business model.

Analysis: Congress continues to pound the credit rating agencies, and powerful Members have suggested in public hearings that the agencies have an inherent conflict of interest.  Some have gone so far as to accuse the agencies of colluding with the issuers in selling securities knowing that they will default.  This extreme position just illustrates that current environment on the Hill.  Prominent members have suggested such remedies as requiring the CRAs to become non-profit organizations, requiring rotation of CRAs so that the same agency cannot rate an issuer twice in a particular period, enhanced disclosures, requiring the SEC to publish performance statistics, and even exposing the agencies to liability for errors.  The SEC announced that it is examining the agencies and will likely revisit its regulations over the agencies as part of this process.