Lawmaker Seeks Group Liability for Rating Agencies

A key House lawmaker wants to make credit rating agencies — widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities that triggered the financial crisis — collectively liable for inaccuracies.

Pennsylvania Democrat Paul Kanjorski's new 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.

Industry executives and Republicans immediately slammed the idea, warning it would cause a flurry of costly lawsuits and reduce competition in an industry already dominated by Moody's Investors Service, Standard & Poor's and Fitch Ratings.

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

Moody's, Standard & Poor's and Fitch Ratings account for around 95 percent of the ratings market.

Raymond McDaniel, chairman and CEO of Moody's Corp., said the company supported enhanced oversight of the industry. But imposing collective liability could increase the number of meritless lawsuits over unhappiness with ratings and reduce competition, he told the subcommittee at a hearing Wednesday.

Committee Republicans also chafed at proposed changes in liability. Rep. Spencer Bachus of Alabama said they "could discourage new entrants into this marketplace and further entrench the dominant rating agencies."

Kanjorski said his proposal was "the start of a process." His draft also would allow investors to take legal action against rating agencies that "knowingly or recklessly" fail to review significant information in developing ratings. It includes Obama administration proposals to tighten government oversight of the rating industry, as part of the effort to overhaul the nation's financial rules.