Rating agencies fight (and lobby) for survival

Introduction

It’s been a tough year for the big three credit rating agencies. Under Dodd-Frank, the companies lost most of their protections from investor lawsuits and were forced to submit to a host of new regulations.

Worst of all, from the credit raters’ perspective, federal financial regulators were ordered by the law to remove all references to credit agencies from their rules and regulations. Regulators were told to evaluate securities and other financial products using alternative methods. This rule change, once adopted, effectively frees banks from having to pay one of the designated agencies to rate their products.

In recent months, the rating agencies have spent hundreds of thousands of dollars to delay this and other Dodd-Frank measures, part of an unabated outflow of cash that the rating agencies have funneled to lobbyists since the debate over financial reform began. Senate disclosure records reveal that the three big rating agencies have spent more than $6 million on lobbying, mostly related to financial regulatory reform, since 2009.

The pace of spending barely slowed with the passage of the Dodd-Frank Act.

In the third quarter of 2010, the three major agencies — Moody’s Corp., Standard & Poor’s Financial Services, and Fitch Ratings Inc — collectively spent $970,000 on financial reform-related lobbyists. That compares with $990,000 in the second quarter of 2010, as the bill was debated in Congress.

The agencies have some surprising allies in their quest to delay implementation of the rule erasing mention of the agencies from federal regulations. Regulators, banks, and even consumer advocated have cautioned against making the changes until sound, alternative methods for assessing the value of financial products are developed. They worry that banks may avoid state and corporate debt because proving the value of those assets without relying on rating agencies is simply too much work.

Comptroller of the Currency John Walsh recently testified before the Senate Banking Committee that the ban on using ratings in assessments “goes further than is reasonably necessary.”

“This one, I just think in the heat of the moment, they didn’t think it through,” Barbara Roper, director of investor protection at the Consumer Federation of America, told Reuters.

The regulators have until July 2011 to report to Congress on the progress they are making in removing rating agency designations from their books. The Fed and other financial regulators in August issued an advance notice of a rulemaking about what alternatives to credit ratings could be used in capital rules for banks.