NOVEMBER 20, 2008 Senate Probe to Look at Bond-Rating Firms By EVAN PEREZArticle
Comments more in Politics »WASHINGTON --
The Senate's Permanent Subcommittee on Investigations is opening a probe into causes of the global financial crisis, focusing in part on whether bond-ratings firms, driven by conflicts of interest, boosted mortgage investments that have since collapsed.
Wall Street firms already have seen a preview of what they can expect. Rep. Henry Waxman (D., Calif.) has used his post as chairman of the House Oversight and Government Reform Committee to subpoena records from American International Group Inc. and Lehman Brothers Holdings Inc. House hearings have looked into the ratings firms, but the Senate subcommittee's investigation is expected to go more deeply into the matter.
Sen. Carl Levin (D., Mich.), who heads the investigations subcommittee, has called attention to financial derivatives known as credit-default swaps, which he calls "one of the prime culprits responsible for this financial disaster." Investigators are expected to look into how those derivatives were marketed and used by banks.
On the ratings side, the subcommittee's ranking Republican, Sen. Norm Coleman of Minnesota, said investigators want to know whether competition among firms led them to issue certain ratings in order to win business from banks.
"We're going to look at the root causes of this, looking at whether the inherent conflict clouded the judgment of the agencies," Sen. Coleman said in an interview. "Somebody missed something here. Was it because of the complexity or was it in the zeal to make money?"
In focusing on the bond-rating industry, the Senate subcommittee would be joining several other regulatory and investigative agencies, including the Securities and Exchange Commission and New York's attorney general, Andrew Cuomo.
An SEC report in July found "serious shortcomings" in the practices at the three major credit-rating firms, Moody's Corp., McGraw-Hill Cos.' Standard & Poor's and Fimalac SA's Fitch Ratings. The report criticized poor disclosure practices and poor oversight of potential conflicts of interests, among other problems. The SEC is expected next month to issue rules aimed at limiting conflicts.
"We've instituted a number of initiatives to mitigate conflicts," said a Moody's spokesman. Fitch and S&P declined to comment.
Washington lawmakers and federal prosecutors are pushing to hold Wall Street executives and regulators accountable for the financial crisis.
The White House and members of both parties largely put off assigning blame during September and October as they worked together on bailouts for financial companies. But with a new administration taking over and a new Congress being seated in January, the effort is expected to start anew.
Already, some have focused initial attention on deregulation as the culprit, while others have suggested that the government used laws such as the Community Reinvestment Act to bully banks into lending money to unfit borrowers.
—Aaron Lucchetti contributed to this article. Write to Evan Perez at firstname.lastname@example.org