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Senators scrutinize rating agencies

first_imgVickie Tillman, executive vice president of credit market services for S&P, a subsidiary of McGraw-Hill Cos., said there is no collaboration between S&P and investment banks that issue debt, but acknowledged that the agency has an “open dialogue” with sellers of mortgage securities. 160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! Several members of the Senate Banking Committee questioned rating agency executives about whether they provided advice to investment banks that issue complex mortgage securities tied to subprime home loans. “It seems to me that credit rating agencies are playing both coach and referee,” said Sen. Robert Menendez, D.-N.J. The rating agencies’ seal of approval effectively concealed the true risks of those investments, lawmakers said, comparing the agencies’ lack of foresight about the risks inherent in the subprime mortgage market with their failure to anticipate the collapse of Enron Corp. and WorldCom. Senators were particularly concerned with a key aspect of the agencies’ business models: they get paid by the companies whose bonds they rate. That’s like a film production company paying a critic to review a movie, and then using that review in its advertising, said Sen. Jim Bunning, R-Ky. Executives from S&P and Moody’s Corp. said their methodology for monitoring the risk of mortgage-backed bonds was sound, but also pledged improvement. By Alan Zibel THE ASSOCIATED PRESS Senators accused executives from major credit rating agencies on Wednesday of being hampered by conflicts of interest that may have contributed to the mortgage market turmoil rattling investors worldwide. The biggest rating agencies – Standard & Poor’s, Moody’s Investors Service and Fitch Ratings – are under fire from critics who say they failed to give investors adequate warning of the risks associated with mortgage-backed securities. Those investments are plummeting in value as home-loan defaults soar, particularly among borrowers with weak, or subprime, credit histories. last_img read more