Credit rating companies must "shoulder some responsibility" for subprime-mortgage bonds that have sparked a crisis in credit markets, said Richard Shelby, the U.S. Senate Banking Committee's top Republican.
Moody's Investors Service, Standard & Poor's and Fitch Ratings face congressional scrutiny for an "inherent conflict" in helping construct loan-backed securities, then issuing ratings on them, Shelby told journalists in Brussels today.
"The credit rating agencies have played a central role in the subprime debacle," said Shelby, an Alabama Republican who is visiting European officials. "They say that they are only giving an opinion. But they are also consultants to a lot of these companies that have issued this debt, and they have rated it, and that's how they make money."
Shelby's comments add to pressure on the rating companies from both parties in Congress after a rout in securities backed by subprime mortgages has spread across global markets.
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat who's running for president, said Aug. 1 he would propose a law to govern ratings firms' conflicts of interest in providing ratings to investors that are paid for by the companies issuing the securities.
"Regulation will have to play a role, but you can't regulate everything in the market," Shelby said today. "They are already tightening the credit. For you to get a subprime loan today, it would be hard."
Shelby blamed lenders for "reckless disregard of fundamental economics" as well as "common sense" in their past lending to questionable borrowers without down payments. He called it "mind-boggling" that rating companies would then give investment-grade ratings to securities representing pools of such loans, called subprime because they often go to borrowers who can't get a traditional home mortgage.
S&P is a unit of McGraw-Hill Cos. Moody's is part of Moody's Corp. Both parent companies are based in New York. Fitch, with joint headquarters in New York and London, is a unit of Paris- based Fimalac SA.
Shelby singled those companies out as the biggest rating issuers.
Martin Winn, a spokesman for Standard & Poor's, declined to comment. Peter Fitzpatrick, a spokesman for Fitch, said he couldn't comment without seeing a transcript of Shelby's comments.
The rating companies, often referred to as "agencies" though they are for-profit businesses, have answered past criticism over potential conflicts of interest by adopting a code of conduct drawn up by regulators including the U.S. Securities and Exchange Commission.
"The banking regulators have some culpability with the subprime," Shelby also said. "They obviously knew what was going on, and if they didn't know, they should have known."