Shortly after proposing legislation to strengthen SEC oversight of the credit-rating agencies responsible for measuring the safety of investment in public companies and securities, lawmakers lashed out at representatives from the industry who appeared at a House subcommittee panel Tuesday afternoon.
Since the collapse of Wall Street's financial titans, the largest of these agencies -- who are paid by the companies they are rating -- have typically argued that their ratings are mere opinions, neither statements of fact nor professional judgments. But committee members said that, since the small group of agencies licensed by the SEC are implicitly endorsed by the government, that isn't good enough.
"I'm not a professional, but I play one in the marketplace," was New York Democrat Gary Ackerman's assessment of the familiar argument from Fitch Ratings CEO Stephen Joynt. "If this is just your opinion, why don't we just strip away your government license to operate?"
Ackerman, who went on to compare the agency's "opinions" to those of his cousin Sheldon, joined with Delaware Republican Michael Castle to sponsor a bill that would give the SEC more authority to shape securities-rating policy. In the Senate, Rhode Island Democrat Jack Reed introduced a similar bill Tuesday that would punish conflicts of interest or malfeasance on the part of credit-rating agencies.
Along with Moody's and Standard & Poor's, Fitch accounts for the bulk of the $5-billion-a-year credit-rating industry, but Joynt attempted to distance Fitch from the other two firms as he argued against eliminating the SEC's license limitations, which he claimed would ironically reduce the number of rating agencies available to consumers.
"We believe they will default to the largest 'brand name' rating agencies (Moody's and S&P), which is not a positive if one of your objectives is increasing competition and thereby fostering a better work product," Joynt wrote in his prepared remarks. Later, he asked that the government act in a manner that was "fair and balanced" and not "throw the baby out with the bathwater."
Just as Joynt tried to draw a line between Fitch and the other two firms, executives from smaller rating agencies sought to distance themselves from Fitch. Robert Dobilas, the CEO of the 50-man rating firm Realpoint, noted that his firm is financed by subscribers rather than its subjects, just as the Big Three agencies were for their first 75 years in business, and that they perform monthly due diligence reporting on the agencies they rate.
"They do not have the same philosophy when it comes to surveillance," Dobilas said of the Big Three.
Though Joynt disagreed, most of the six panelists assembled for the hearing said that a combination of funding sources, including investors and subscribers, would decrease the influence of the parties being evaluated by rating agencies. Rep. Castle expressed concern that smaller groups would be harder-pressed to pay for ratings, but appeared visibly frustrated when Joynt offered no alternatives.
UCLA law professor Eugene Volokh said that if the credit-rating agencies are basically advertising, such speech is generally held to have a much lower level of First Amendment protection than newspapers or ostensibly-independent media. In that case, Congress would face little legal challenge in restricting their means of funding, Volokh said.
While lambasting Fitch CEO Joynt, Ackerman praised Volokh's assessment. "Rating agencies are not equal to newspapers," Ackerman said. "Your industry ... does not have the sense of integrity that these other industries have."