Senator Schumer Reveals Credit-Ratings Agencies Violated Own Conflict-Of-Interest Rules

Calls For Tighter SEC Oversight Of Firms; SEC Chairman Cox Acknowledges Investigators Have Uncovered Improper Practices At Ratings Firms

April 22, 2008 -- Report: Moody's Curried Favor With Clients To Inflate Firm's Market Share -- WASHINGTON, DC -- U.S. Senator Charles E. Schumer (D-NY) today pressed the head of the Securities and Exchange Commission to crack down on conflict-of-interest violations at the major credit-ratings agencies, which he said conspired to inflate an unsustainable credit bubble. Under questioning by Schumer before the Senate Banking Committee, SEC Chairman Christopher Cox disclosed that the firms disregarded their own internal controls meant to prevent the relationship between the firm and its clients from getting too close.

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"There is ample evidence that the credit-rating agencies have embraced a set of practices that stoke conflict-of-interest issues," Schumer said. "The agencies have refused to play by the rules, even those of their own making. The SEC is in the process of exposing these conflicts; the next step is to prevent them from being repeated."

Schumer said that coziness between the firms and the clients whose bonds they grade may have compromised what is supposed to be an objective ratings process. He said the SEC should use its new, year-old authority over the firms to guard against such conflicts of interests. He suggested that the agency articulate a set of criteria that should trigger enhanced scrutiny in the future. Among those criteria, Schumer said, would be significant changes in market share, major turnover in a firm's ranks of analysts, and deviation from historical accuracy averages.

The Wall Street Journal reported earlier this month that Moody's embraced a set of questionable practices intended to win over clients and capture greater market share. On at least one occasion involving Bank of America, Moody's adjusted its initial bond rating after the client complained. Also, the agency frequently rotated analysts at the client's request. Schumer said such practices should at the very least be disclosed to investors, if not outright banned.

Going forward, Schumer has said a return to the investor-funded model may be worth considering, though he has acknowledged that arrangement presents its own challenges.

Source: Senator Charles E. Schumer