• Congress Weighs Liability for Credit-Rating Agencies
  • June 25, 2009
  • Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
  • Congressional lawmakers who fault credit-rating agencies for their role in the near breakdown of the financial markets are pushing to expose them to lawsuits from investors and issuers.

    Senator Jack Reed (D-R.I.) recently introduced a bill that would expose ratings firms to the possibility of class-action lawsuits if they “knowingly or recklessly” fail to review key data in rating debt.

    “The view that the agencies are mere publishers issuing opinions bears little resemblance to reality, and the threat of civil liability would force the industry to issue more accurate ratings,” Representative Paul Kanjorski (D-Pa.) said at a recent hearing on the industry.

    Reed and Kanjorski, both of whom chair key subcommittees overseeing securities issues, have both blamed credit-rating firms for issuing overly positive ratings on certain kinds of debt. In a statement, Reed said the practice of having issuers pay top ratings agencies to rate their debt gives agencies incentive to offer “unjustifiably favorable ratings.”

    Kanjorski suggested firms were at worst “grossly negligent” in recent years in their evaluation of mortgage-backed securities and structured finance products. “Stronger oversight and smarter rules are therefore needed to protect investors and the overall credibility of our markets,” he said.

    The idea of greater liability met resistance from other subcommittee members. Representative Scott Garrett (R-N.J.) said at the hearing that instead of regulating the ratings industry, the government should encourage investors to conduct their own due diligence and not just rely on ratings. “Investors have become increasingly, and too often, solely, reliant on the use of these ratings in determining the safety and soundness of any investment,” Garrett said.

    Why it matters: With a Democratic majority on the Hill and a Democrat in the White House, it seems inevitable that some regulation will come out of the recent market meltdown and banking crisis. Whether that regulation will cover the credit-rating agencies, it is clear that congressional lawmakers have them in their sights.