Heads Should Have Rolled at Raters: Congresswoman

California's Jackie Speier shows no patience for excuses from leaders at Moody's and Standard & Poor's.

If Shakespeare were alive today, penning a modern version of Henry VI, Part 2, he might write, “The first thing we do, let’s kill all the rating-agency analysts.” And there are some, indeed, who might identify with the spirit of such a statement — California Congresswoman Jackie Speier, for one.

Almost three hours into a House subcommittee hearing Wednesday on rating-agency reform that had been remarkable for its civility, given the heat the agencies have been under, the tone shifted abruptly when Speier got her chance to question the witnesses.

Her voice edged with anger and impatience, the Democrat noted that her constituents in her San Francisco–area congressional district feel “outrage” that “no one has been held responsible” for the financial crisis. Following is Speier’s exchange with Moody’s chairman and CEO Raymond McDaniel, Standard & Poor’s president Deven Sharma, and Fitch president Stephen Joynt:

Speier: You had rated AIG and Lehman Brothers as AAA, AA, minutes before they were collapsing. After they did fail, did you take any action against the analysts who had rated them? Did you fire them, suspend them? Did you take any action against those who had put that kind of remarkable grade on products that were junk?

[Silence.]

Speier: Mr. McDaniel?

McDaniel: No, we did not fire any of the analysts involved in either AIG or Lehman. Lehman did not have a AA or AAA rating; it had a single-A rating. An important part of our analysis was based on a review of governmental support that had been applied to Bear Stearns earlier in the year. Frankly, an important part of our analysis was that a line had been drawn under the number five firm in the market, and number four would likely be supported as well.

Speier: That’s not analysis. That’s an opinion. I could have that kind of opinion and I’m not an analyst. How could you possibly make that kind of an opinion when you have millions of people relying on that?

McDaniel: Our opinion applies to whether we believe an instrument will pay or will not pay.

Speier: That was a political determination that you made, Mr. McDaniel.

McDaniel: A very important component of that analysis is whether we believe there would be external support in the event of distress. And that analysis is relevant to financial institutions, governmental entities….

Speier [interrupting]: All right, thank you. Mr. Sharma?

Sharma: Congresswoman, financial institutions are very….

Speier: Could you just answer the question? I have a series of them and a limited amount of time.

Sharma: No, we did not fire anybody.

Speier: No one got fired? No one got their hand slapped?

Sharma: The ratings had been downgraded over time for both of those institutions. In Lehman’s case, not only were they trying to raise capital, they were about to raise capital, and on the weekend they declared bankruptcy. And once there’s a run on an institution, it’s very hard to manage that….

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