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Credit Rating Agencies Get Grilled on the Hill

SUZANNE PRATT: The nation's credit rating agencies were under the microscope on Capitol Hill today. Standard & Poor's, Moody's, and Fitch all come under fire for their role in the mortgage meltdown at a Senate Banking Committee hearing. Stephanie Dhue reports,

STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Frustrated law makers want to know how the credit rating agencies missed the troubles in the sub-prime market. New Jersey Senator Robert Menendez scolded Standard & Poor's and Moody's for enabling the market for mortgage-backed securities with their triple "A" ratings.

SEN. ROBERT MENENDEZ (D) NEW JERSEY: It doesn't take a rocket scientist to figure out that, if I have no-document loans, if I have no down payments, if I have ARMs that clearly within the income scheme, are not going to allow me to be able to meet the future, that that security- backed instrument is weak in its potential.

DHUE: Rating agencies are paid by the issuer of the securities they rate. That conflict has led to accusations that credit rating agencies were too cozy with the investment banks that sold mortgage-backed securities. Moody's Michael Kanef says the firms have a strong incentive to get the ratings right.

MICHAEL KANEF, GROUP MANAGING DIRECTOR, MOODY'S FINANCIAL SERVICES: The purchasers of the securities are the ones that are requesting the rating. The investment bankers and the issuers that we deal with only work with Moody's and the other rating agencies that they choose to work with because of the pull from the investors. If investors lose faith in the rating agencies themselves, that demand goes away and the desire for the ratings goes away.

DHUE: Last year, Congress passed a law to give the Securities and Exchange Commission new powers to oversee the agencies. The SEC is now investigating the credit firms for conflicts of interest. While some law makers want more regulation of the agencies, others want to see how that new law works before making any changes. New Hampshire Republican John Sununu fears any new regulations now could further weaken the housing market.

SEN. JOHN SUNUNU (R) NEW HAMPSHIRE: In an environment where it's much more likely than not that we're moving from 10 months of inventory to 12 months of inventory to 14 months of inventory over the next six to nine months, I think we need to be very thoughtful and cautious in making any changes to the regulatory structure.

DHUE: Analysts don't expect new legislation this year. But scrutiny on the agencies will continue. House law makers will question the rating firms tomorrow. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.