Congressman Defends Bid To Reform Credit Agencies
ROBERT SIEGEL, host:
The role of the ratings agencies in the financial crisis inspired much outrage earlier this year. Moody's Investors Service, Standard & Poor's and Fitch Ratings are commercial companies that rate bonds. A triple-A rating from Standard & Poor's says that a bond or a mortgage-backed security is issued by the best and most reliable and stable borrowers.
Well, over the past year, any number of securities that won top grades from rating agencies turned out to be handsomely wrapped bundles of junk mortgages. Reforming the ratings companies was a much discussed aim of financial regulatory reform.
And we're going to hear now from one of the sponsors of a bill that purports to satisfy that aim, Representative Paul Kanjorski, a Pennsylvania Democrat and a senior member and subcommittee chair on the House Financial Services Committee. Welcome to the program, Congressman Kanjorski.
Representative PAUL KANJORSKI (Democrat, Pennsylvania; Subcommittee Chairman, House Financial Services Committee): Oh, my pleasure.
SIEGEL: First, how would your bill address what seems to be a fundamental problem with these companies, that they're competitive and they're paid by the institution that's issuing the bond? It seems that if all the movie critics in the world were paid by the film studios, there wouldn't be a lot of movies getting panned.
Rep. KANJORSKI: You're absolutely correct. It's actually shocking that that should be the case. At one time, it wasn't the case. Back in the '70s, the investors paid the rating agencies. But it became financially unattractive and not substantial enough to support the rating agencies. So they changed the methodology and I think imported a innate conflict of interest into the process where the issuer of the bonds were actually paying the rating companies to rate his bonds. And when you look at what happened over the course of years, very often, the payment followed the rating.
SIEGEL: Well, given that starting point, can you reform the system without changing that basic fact of life about the ratings agencies?
Rep. KANJORSKI: I don't know. That's an interesting question. We anticipated doing that, but it became so evident that you would have a hiatus.
SIEGEL: What do you mean by that?
Rep. KANJORSKI: Well, I mean, if we - by statute, if we outlawed the issuers paying these companies now that exist on that payment, we'd just go out of business. So there wouldn't be any.
SIEGEL: So nobody will be rating them, you're saying.
Rep. KANJORSKI: That's right.
SIEGEL: Do I hear you saying when your bill emerges from Congress, maybe some more regulation, maybe some stricter rules, but no dramatic change of the system as we know it?
Rep. KANJORSKI: You have to look at our bill as somewhat of an emergency bill, too. We were stuck with a completely frozen financial system a year ago, and we worked very hard to unfreeze some of the credit markets and some of the other situations. Now that is no longer happening, but we've got to get something started because we're really dying for additional capital in the American marketplace.
We don't have the time to do the perfect. We just have the time to do the good. And then, if necessary, and we've empowered the SEC to do in-house regulatory actions on their part to straighten out or put pressures on rating agencies as they see necessary, and then we put a lot of penalties in the rating bill.
I mean, we've now subjected them to being sued. And we've reduced the standard on which the suit can be made from knowingly and recklessly to gross negligence.
SIEGEL: So if a ratings agency really got it wrong and people lost money as a result and it can be shown that reasonable people should've been able to see that that was adjunct security, they could be sued on that basis.
Rep. KANJORSKI: Absolutely. And the threat of that type of lawsuit should entice them to coming up to an acceptable behavioral standard in that field. If they don't, then, you know, just - and they may be sued out of business because, unfortunately, their assets aren't nearly as large as the securities they rate. And one failure on their part can wipe them out. But in our system that may be the only way of operating the cleansing operation.
SIEGEL: Representative Kanjorski, I'd just like you to try to explain something about life in Washington nowadays. I guess that's what it's about. As you said, the bill that you've written doesn't do everything. It's an emergency bill. But we're now more than a year out from, you know, the collapse of Lehman Brothers, and most Americans think of emergency as being something that response to an emergency takes place a lot faster than this.
Why is it that we're still talking about a bill that hasn't been voted on yet if it's an emergency response?
Rep. KANJORSKI: Well, the bill has been voted on in the House. And now we're waiting for the Senate. And they anticipate that sometime at the end of January or early February, they should have their process completed on the Senate side, and we should be ready for conference. You know...
SIEGEL: But that would mean that something would be enacted some time in the spring is what you're saying.
Rep. KANJORSKI: That's very fast, actually. I mean, I know it doesn't appear to people. But you have to remember, it's just really the last five, six months that we've been able to take a deep breath and say, well, the meltdown crisis is over. Now we can work to try and put in the reforms that are absolutely necessary so this won't happen again.
SIEGEL: Well, Representative Paul Kanjorski of Pennsylvania, thank you very much for talking with us today.
(Soundbite of music)
Rep. KANJORSKI: Thank you, my friend.
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