Lawmaker wants to hold ratings firms liable for inaccuracies

Pennsylvania Democrat Paul Kanjorski’s new draft bill includes a plan meant to address what critics contend is the crux of the current system’s problem: Companies that issue securities - as opposed to investors - pay the agencies for the ratings on those securities.

Raymond McDaniel, chairman and chief executive of Moody’s Corp., said the company supports enhanced regulatory oversight of the industry. But imposing collective liability could increase the number of meritless lawsuits over unhappiness with ratings and create an unpredictable business environment, he told lawmakers yesterday.

Kanjorski, chairman of a House Financial Services subcommittee, contends that establishing collective liability could spur the powerful rating agencies - Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings - “to police one another and release reliable, high-quality ratings.’’

“This is the start of a process,’’ he said at a subcommittee hearing.

Kanjorski’s draft also includes Obama administration proposals to tighten government oversight of the rating industry, as part of the effort to overhaul the nation’s financial rules.

Congress is escalating its scrutiny of the Wall Street rating industry as well as closely examining possible legislative changes to reshape the business.

At another House hearing, two former Moody’s employees detailed allegations of misconduct at the firm as lawmakers took aim at an industry they condemned as rife with conflicts of interest and needing reform.

Seeking accountability for the role of the ratings industry in the financial crisis, members of the House Oversight and Government Reform Committee questioned a high-level Moody’s executive, who denied the former employees’ allegations.

The rating agencies had to downgrade thousands of the securities last year as home-loan delinquencies soared and the value of those investments plummeted. The downgrades contributed to hundreds of billions in losses and write-downs at big banks and investment firms.

The agencies are gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company’s ability to raise or borrow money, and at what cost securities will be purchased.

Moody’s chief credit officer, Richard Cantor, acknowledged the firm misjudged the extent of the subprime mortgage disaster, but said it has improved its operations and acted more transparently in the past year.