November 17, 2002	Sunday	Ramazan 11, 1423

WASHINGTON, Nov 16: The big US credit rating agencies came under fire on Friday from fund managers and small rivals at a Securities and Exchange Commission hearing into the business of judging corporate America’s credit-worthiness

Amid volatility in the corporate bond market after a rash of business scandals, hearing participants argued about the dominant market positions of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings; how the Big Three make money and their access and handling of information.

We have tremendous respect for the agencies ... Things really haven’t gone too wrong. However, all is not well, said Cynthia Strauss, director of taxable bond research at Fidelity Investments, the nation’s largest mutual funds group.

Fidelity’s view is that the (major rating agencies) do need greater oversight to make them more accountable to the markets they serve, Strauss said at the public hearing.

No decisions were made at the session, but another hearing was scheduled to be held Thursday at the SEC and industry officials said rule changes could be coming down the road.

Although Congress was seen as busy on other fronts for now, the SEC has been looking at the credit rating agencies issue for some time. SEC commissioners attending the session asked skeptical questions about agency funding and information flow.

SEC Chairman Harvey Pitt, who resigned last week, stayed for the first 90 minutes of the six-hour session.

Debra Perry, a senior managing director at Moody’s in New York, said: It’s certainly possible that there could be proposed changes in the rules that effect (the big agencies).

Of the handful of firms that rate corporate credit, Moody’s and S&P are by far the largest, with Fitch a distant third and a handful of even smaller competitors bringing up the rear.

The SEC regulates the industry by designating certain credit rating agencies as Nationally Recognized Statistical Rating Organizations, or NRSROs. Today, only the Big Three have this designation, which their smaller rivals complain gives them unfair and entrenched market power.

In defense of big firms like his own, S&P President Leo O’Neill said at the hearing that S&P’s immense size and influence reflect its record of independence and reliability.

Our ratings are subject to intense market scrutiny every day, but remain global benchmarks ... The valued reputation that Standard & Poor’s has earned is well-deserved, he said.

Earlier this year, scandals at Enron Corp.WorldCom Inc. Global Crossing Ltd. and elsewhere highlighted problems in the industry, prompting Congress to order the SEC to study and report on it.

Just days before Enron filed what was then the largest-ever bankruptcy in US history on Dec. 2, both S&P and Moody’s were still rating the energy trader’s debt as investment grade.

Those ratings were at the low end of both firms’ scales and were immediately chopped to non-investment grade — or junk bond status — after the bankruptcy filing by the company once ranked as the seventh largest in America.

But members of Congress afterward asked why the rating agencies, which employ hundreds of financial analysts, were not onto Enron’s troubles sooner and more publicly.

Pitt on Feb. 25 said: We’re going to be announcing some initiatives shortly in that area.

A Senate committee held a hearing on the failures of the credit raters on March 20.

But as the scandal season wore on last summer, Congress became preoccupied with problems inside investment bank research departments, accounting firms, law firms and corporate boards. The credit rating agencies discussion was left behind.

Sean Egan, managing director of Egan-Jones Ratings Co., a small credit rating agency based near Philadelphia, said at the hearing that a central conflict was the major credit raters’ dependence on fees from the corporations being rated.

They’re serving the issuers’ interests, Egan said. This is crazy. There’s no way this should happen.—Reuters