Financial Regulatory Forum

Congress to examine SEC failure to probe warnings on Moody’s

By Reuters Staff
September 30, 2009

Committee Chairman Edolphus Towns (D-NY) (C), ranking member Rep. Darrell Issa (R-CA) (L) and Rep. Dennis Kucinich (D-OH) (R) talk to reporters after a hearing of the House Oversight and Government Reform Committee on Capitol Hill in Washington, June 25, 2009.    REUTERS/Jonathan Ernst    (UNITED STATES POLITICS BUSINESS) (FILE) WASHINGTON, Sept 30 (Reuters) – A congressional panel will expand its examination of credit rating agencies to look at why U.S. securities regulators ignored warnings from former Moody’s Corp executives about the company’s weak compliance department and ratings process.

“We want to look at the fact that the Securities and Exchange Commission did not respond” to concerns from Moody’s former head of compliance, Rep. Edolphus Towns, chairman of the House Oversight and Government Reform Committee, told CNBC television on Wednesday.

Towns’ panel held a hearing on Wednesday to probe allegations from two Moody’s whistleblowers that company managers favored revenues over ratings quality.

Scott McCleskey, a former Moody’s senior vice president of compliance, sent the SEC a letter in March 2009 alleging that he was routinely ignored when he warned that the firm was not properly monitoring municipal bond ratings.

Eric Kolchinsky, a recently suspended managing director at Moody’s, will tell Congress that analysts are “bullied” by managers who override their decisions to generate revenue.

“Kolchinsky tried to tell the SEC about his concerns but his calls were not returned,” according to a memo prepared by Republican members of the committee and obtained by Reuters.

Allegations that the SEC ignored the whistleblowers’ concerns could be another black mark against the regulator, which is still reeling from its failure to uncover Bernard Madoff’s $65 billion investment scam.

An SEC spokesman has said the agency has established an examination program for credit rating agencies that includes reviews of disclosures, policies, and procedures regarding municipal securities ratings.

“We are focusing carefully on the tips and complaints we receive and following up, where appropriate, with examinations targeting suspected problems,” SEC spokesman John Nester said.

Global policymakers are trying to make credit agencies more accountable, after the agencies helped fuel the credit crisis by assigning top ratings to toxic mortgage securities that later deteriorated in value.

The industry is dominated by Moody’s, McGraw-Hill Cos Inc’s Standard & Poor’s, and Fimalac SA’s Fitch
Ratings.

Shares of Moody’s dropped nearly 7 percent to $19.36 in morning trading on the New York Stock Exchange.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •