Pa. legislator proposes bill on liability for ratings firms

WASHINGTON - A House lawmaker from Pennsylvania said yesterday that he wanted to make credit-rating agencies collectively liable for inaccuracies by any of them.

The big ratings firms, such as Standard & Poor's and Moody's Corp., have been widely criticized over the last year for failing to give investors adequate warning of the risks involved in subprime-mortgage securities, which triggered the worldwide financial crisis.

Rep. Paul Kanjorski's draft bill includes a plan meant to address what critics contend is the crux of the current system's problem: companies that issue securities - as opposed to investors - pay the agencies for ratings of those securities. Kanjorski, a Democrat, represents the Scranton-Wilkes-Barre area.

Raymond McDaniel, chairman and chief executive officer of Moody's, said the company supported enhanced regulatory oversight of the industry. But imposing collective liability could increase the number of meritless lawsuits over unhappiness with ratings and create an unpredictable business environment, he told the lawmakers at a hearing yesterday.

Kanjorski, chairman of a House Financial Services subcommittee, contends that establishing collective liability could spur the powerful ratings agencies, which also include Fitch Ratings Inc. - "to police one another and release reliable, high-quality ratings."

Kanjorski's draft includes Obama administration proposals to tighten government oversight of the rating industry, as part of the effort to overhaul the nation's financial rules.

At a separate House hearing yesterday, two former Moody's employees provided detailed allegations of misconduct at the big ratings firm.

Members of the House Oversight and Government Reform Committee questioned a high-level Moody's executive, who denied the former employees' claims.

The rating agencies had to downgrade thousands of the securities last year as home-loan delinquencies soared and the value of those investments plummeted. The downgrades contributed to hundreds of billions in losses and write-downs at big banks and investment firms.