The Obama administration is resisting calls to help ensure that credit ratings are reliable, saying this would force investors to rely even more on the ratings.
Although credit rating agencies have been accused of assigning top ratings to complex securities that later crumbled in value, the government should not be in the business of regulating the agencies' methodologies or performance, a top Treasury official told Congress on Wednesday.
To do so would put the government in the position of validating private sector actors and would likely exacerbate over-reliance on ratings, the Treasury's assistant secretary for financial institutions, Michael Barr, said.
Moody's Corp, McGraw-Hill Cos Inc's Standard & Poor's and Fimalac SA's Fitch Ratings have been blamed for contributing to the financial crisis by not doing enough due diligence on securities linked to shoddy mortgages.
Many lawmakers are outraged with how the rating agencies performed and have been seeking ways to make them more accountable.
We need to restore confidence that a rating means what it says, said Democratic Senator Charles Schumer, who introduced legislation on Wednesday to help prevent banks and other bond issuers from shopping for the best rating for their product.
The Senate Banking Committee held a hearing on Wednesday to examine the Obama administration's plan to reform the credit rating industry.
As part of its plan to overhaul U.S. financial regulation, the administration has proposed increasing disclosures and ways to crack down on what some consider the rating agencies' conflict of interests.
Many of its proposals are already being addressed by the Securities and Exchange Commission, which has adopted rules to give investors more information on how an agency determines a rating for a complex product like mortgage-backed securities.
The SEC is also contemplating measures to prevent so-called ratings shopping and is mulling requiring bond issuers to disclose the preliminary rating obtained from credit agencies before they select the credit agency to rate their product.
The biggest credit agencies are all paid by the banks or issuers whose products they rate. Critics call this so-called issuer-paid model a conflict of interest. Barr warned against prescribing a specific business model and said a diversity of business models was needed.
Senators expressed frustration with the dominance of Moody's, Standard & Poor's and Fitch Ratings.
Everyone agrees that the current rating agency model has failed, especially for the complex structured products. We must break the hold of the top two or three agencies, said Republican Senator Jim Bunning.
(Reporting by Rachelle Younglai, editing by Gerald E. McCormick and John Wallace)