Credit rating execs to face congressional heat

Reuters, by Karey Wutkowski, WASHINGTON, Wed Jul 27, 2011

(Reuters) - Executives from U.S. credit rating agencies are expected to face sharp congressional scrutiny on Wednesday for their companies' roles in the financial crisis and the U.S. debt ceiling debate.

Deven Sharma, president of McGraw-Hill Cos Inc unit Standard & Poor's, and Michael Rowan, global managing director for the commercial group at Moody's Corp's Moody's Investors Service, are due to appear before the House Financial Services subcommittee.

The hearing was originally scheduled to analyze whether the 2010 Dodd-Frank financial oversight law had succeeded in reducing investors' blind reliance on rating agencies.

Such companies have been blamed for helping to fuel the financial crisis by assigning top ratings to securities that were backed by subprime mortgages, which then plummeted in value as the housing market collapsed.

But, it is the companies' front-and-center role in the deficit debate that is now expected to draw the most heat.

The agencies have been criticized for issuing ratings and warnings that negatively reflect on countries in the throes of sensitive negotiations regarding sovereign debt, including Greece and the United States.

"The debt ceiling negotiations and the long-term fiscal health of the U.S. have brought a renewed focus on the credit rating agencies," Randy Neugebauer, chairman of the oversight subcommittee, said in a statement on Tuesday.

U.S. lawmakers are trying to reach a deal by August 2 to raise the $14.3 trillion U.S. debt limit and avoid a credit default.

WHOSE CREDIBILITY IS AT STAKE?

Rating agencies have warned that the United States needs to come up with a credible deficit-reduction plan to keep its triple-A rating in the long term. S&P has threatened to downgrade the country in the next three months in the absence of such a plan.

In prepared testimony released on Tuesday and due to be delivered on Wednesday, Sharma and Rowan said their companies were embracing Dodd-Frank reforms, including dropping credit ratings from information used by government agencies when judging the riskiness of a company.

A Republican aide said lawmakers would press regulators and rating agency executives on whether Dodd-Frank perpetuates the market power of the Big Three rating agencies -- S&P, Moody's and Fimalac SA's Fitch Ratings.

Republicans will question whether the cost to rating agencies to comply with new regulations is so high that it stifles competition, the aide said.

In the testimony, Sharma warned against over-regulation by the government that would push the companies into using a common rating methodology rather than individual methods to arrive at ratings. He said such an approach would compromise their independence.

"In a global economy where we rate more than 120 sovereign governments, it is particularly important that rating methodologies not become subject to influence by one or more countries seeking to benefit its own rating, which would undermine the independence, comparability and value of ratings to all," Sharma said.

(Reporting by Karey Wutkowski and Sarah N. Lynch in Washington and Daniel Bases in New York; Editing by Andrea Ricci, Gary Crosse; Toni Reinhold)

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