Capital Markets

Heads Should Have Rolled at Raters: Congresswoman

California's Jackie Speier shows no patience for excuses from leaders at Moody's and Standard & Poor's.
David McCannOctober 1, 2009

If Shakespeare were alive today, penning a modern version of Henry VI, Part 2, he might write, “The first thing we do, let’s kill all the rating-agency analysts.” And there are some, indeed, who might identify with the spirit of such a statement — California Congresswoman Jackie Speier, for one.

Almost three hours into a House subcommittee hearing Wednesday on rating-agency reform that had been remarkable for its civility, given the heat the agencies have been under, the tone shifted abruptly when Speier got her chance to question the witnesses.

Her voice edged with anger and impatience, the Democrat noted that her constituents in her San Francisco–area congressional district feel “outrage” that “no one has been held responsible” for the financial crisis. Following is Speier’s exchange with Moody’s chairman and CEO Raymond McDaniel, Standard & Poor’s president Deven Sharma, and Fitch president Stephen Joynt:

Speier: You had rated AIG and Lehman Brothers as AAA, AA, minutes before they were collapsing. After they did fail, did you take any action against the analysts who had rated them? Did you fire them, suspend them? Did you take any action against those who had put that kind of remarkable grade on products that were junk?


Speier: Mr. McDaniel?

McDaniel: No, we did not fire any of the analysts involved in either AIG or Lehman. Lehman did not have a AA or AAA rating; it had a single-A rating. An important part of our analysis was based on a review of governmental support that had been applied to Bear Stearns earlier in the year. Frankly, an important part of our analysis was that a line had been drawn under the number five firm in the market, and number four would likely be supported as well.

Speier: That’s not analysis. That’s an opinion. I could have that kind of opinion and I’m not an analyst. How could you possibly make that kind of an opinion when you have millions of people relying on that?

McDaniel: Our opinion applies to whether we believe an instrument will pay or will not pay.

Speier: That was a political determination that you made, Mr. McDaniel.

McDaniel: A very important component of that analysis is whether we believe there would be external support in the event of distress. And that analysis is relevant to financial institutions, governmental entities….

Speier [interrupting]: All right, thank you. Mr. Sharma?

Sharma: Congresswoman, financial institutions are very….

Speier: Could you just answer the question? I have a series of them and a limited amount of time.

Sharma: No, we did not fire anybody.

Speier: No one got fired? No one got their hand slapped?

Sharma: The ratings had been downgraded over time for both of those institutions. In Lehman’s case, not only were they trying to raise capital, they were about to raise capital, and on the weekend they declared bankruptcy. And once there’s a run on an institution, it’s very hard to manage that….

[interrupting]: Mr. Joynt?

Joynt: No, no analysts were fired. I would say that our lead analysts from those cases…were disappointed, surprised, and went back and reflected on how [they reached their] conclusions. I think we’ve done a lot of soul-searching about how we perceive this going forward; how we think about our analysis.

Speier, moving quickly on to her next question, did not indicate whether she found that answer any more satisfying than the others.

(The California congresswoman was 28 years old in 1978 when, as a staffer of Rep. Leo Ryan, she participated in a fact-finding mission to Rev. Jim Jones’s Peoples Temple — or Jonestown — in Guyana. Trying to make a hasty exit at the airport on the day more than 900 Jones followers committed suicide, Ryan and four others were shot and killed. Speier was shot five times and lay on the tarmac for 22 hours before being rescued.)

Wednesday’s hearing, meanwhile, was held five days after Rep. Paul Kanjorski (D–Pa.) circulated a draft of legislation to make rating agencies more accountable and transparent. A central provision in the draft would essentially make the 10 nationally recognized statistical rating organizations (NRSROs) responsible for overseeing one another’s work. They would be required to provide one another with all information used in making credit ratings, and then would be jointly liable for monetary judgments against any of them.

The ratings agencies were predictably cool to the idea of joint liability, though McDaniel of Moody’s endorsed information-sharing. And Kanjorski himself acknowledged that it was a mere trial balloon and may not be “the best thinking in the world.”

The point, he said, is to encourage outside-the-box thinking to address the “obvious” problems relating to the rating agencies. Those include the agencies being paid by the companies they rate, companies that don’t like the rating they received from one agency “shopping” their business to a second agency in hopes of getting a better rating, and the unreasonable ratings that were given to securitized instruments.

Still, except for Speier, none of the legislators pushed back at the rating-agency executives for giving nonsubstantive answers to their questions. For example, Joe Donnelly (D–Ind.) asked what can be done to give the agencies “some skin in the game…to make sure that your work isn’t done for investment banks but for accuracy and the American people so they can have some sense of confidence in what you’re doing?”

To that, S&P’s Sharma essentially replied that the existing checks on the agencies’ performance are enough. “Investors influence who the issuer selects as a rating agency — if they’re not satisfied with it, they’re not going to invest in the issuer’s issue,” he said. The agencies also are accountable to the SEC and to the threat of private litigation, he added. And, Sharma said, “We are scrutinized by the market every day. We make the criteria around which we rate public, and if people disagree with us they speak up and we hear them loud and clear.”

Donnelly let that pass unchallenged, and didn’t ask any other witnesses for an answer to his question.