WASHINGTON – A key House lawmaker wants to make credit rating agencies — widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities that triggered the financial crisis — collectively 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 ratings of those securities.
Company executives and Republicans immediately slammed the idea, warning it would cause a flurry of costly lawsuits and reduce competition in an industry already dominated by Moody's Investors Service, Standard & Poor's and Fitch Ratings.
Kanjorski, chairman of a House Financial Services subcommittee, contends that establishing collective liability could spur the powerful rating agencies "to police one another and release reliable, high-quality ratings."
Moody's, Standard & Poor's and Fitch Ratings account for around 95 percent of the ratings market.
Raymond McDaniel, chairman and CEO of Moody's Corp., said the company supported enhanced oversight of the industry. But imposing collective liability could increase the number of meritless lawsuits over unhappiness with ratings and reduce competition, he told the subcommittee at a hearing Wednesday.
Committee Republicans also chafed at proposed changes in liability. Rep. Spencer Bachus of Alabama said they "could discourage new entrants into this marketplace and further entrench the dominant rating agencies."
Kanjorski said his proposal was "the start of a process." His draft also would allow investors to take legal action against rating agencies that "knowingly or recklessly" fail to review significant information in developing ratings. It 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 big ratings 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 Oversight and Government Reform Committee questioned a high-level Moody's executive, who denied the former employees' claims.
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 writedowns at big banks and investment firms.
The agencies are crucial financial 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 by banks, mutual funds, state pension funds or local governments.
Moody's Chief Credit Officer Richard Cantor acknowledged that the firm misjudged the extent of the subprime mortgage disaster, but said it has voluntarily made improvements to its operations and transparency over the past year.
Appearing at the hearing next to the two former Moody's insiders, Cantor said the allegations of inflated ratings and conflicts of interest at the firm leveled by ex-analyst Eric Kolchinsky are groundless.
Moody's reviewed the complaints by Kolchinsky, who was suspended from his job, and found them to be "unsupported," Cantor testified. He said Kolchinsky has refused to cooperate with Moody's inquiry into the matter.
Kolchinsky told lawmakers he believed Moody's violated securities laws by issuing credit ratings the firm knew to be inaccurate. "They still went forward and issued the rating," he said.
Scott McCleskey, who was a senior vice president for compliance at Moody's until he left a year ago, wrote a letter to the Securities and Exchange Commission in March alleging a "lack of meaningful surveillance of municipal securities, contrary to statements by Moody's to the public and to Congress."
McCleskey said he became aware that New York-based Moody's did "virtually no surveillance" on public finance securities, the debt issued by states, counties, towns and school districts.
At one point last year, he and others were told in a meeting that they were forbidden to mention the issue in any e-mails or other written form, McCleskey said.
Oversight Committee Chairman Edolphus Towns, D-N.Y., noted that the law firm Moody's hired to investigate Kolchinsky's allegations was given only verbal instructions and issued no written report. "I think that they're really hiding something in there," he said after the hearing.
The SEC only contacted McCleskey and Kolchinsky, who was suspended in early September, last week, Towns said.
SEC spokesman John Nester said Tuesday 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," he said.
Although he was responsible for compliance, McCleskey said he was excluded from meetings with SEC examiners — who met only with staff from Moody's legal department and outside attorneys. Rep. Marcy Kaptur, D-Ohio, found that "shocking."
The SEC recently proposed rules designed to stem conflicts of interest and provide more transparency for credit rating agencies. One of the SEC's proposals would bar companies from "shopping" for favorable ratings of their securities, by requiring companies to disclose whether they had received preliminary ratings from other agencies.
DETROIT (Reuters) –
General Motors Co (GM.UL) will close Saturn and wind down its dealership network after a deal to sell the faltering brand to Penske Automotive Group (PAG.N) collapsed, the automaker said on Wednesday.
The breakdown of a deal that had been widely expected to close this week will force some 350 Saturn dealerships to close and could cut thousands of auto retail jobs that would have been preserved under a plan by auto magnate Roger Penske.
Shares of Penske Automotive were down almost 10 percent Wednesday in aftermarket trade. The breakdown of the deal was announced after the New York Stock Exchange closed.
GM's failure to complete the deal also adds uncertainty to the automaker's production plans as it struggles to regain its footing following a $50-billion taxpayer funded restructuring.
"This is very disappointing news and comes after months of hard work by hundreds of dedicated employees and Saturn retailers who tried to make the new Saturn a reality," GM Chief Executive Fritz Henderson said in a statement.
Penske, 72, had been negotiating to buy the brand under a deal that would have seen GM supply vehicles under contract until the end of 2011, leaving him free to tie up with other manufacturers afterward.
In a statement, Penske said it had negotiated an agreement to source vehicles from another manufacturer after its supply agreement had ended. But it said that deal was rejected by the other automaker's board of directors.
"Without that agreement, the company has determined that the risks and uncertainties related to the availability of future products prohibit the company from moving forward with this transaction," Penske said in the statement.
Penske did not identify the other automaker.
However, people familiar with the discussions said Penske had been in advanced talks with Renault SA (
GM said it would detail the closure plans for Saturn shortly. Saturn's remaining dealers have already signed wind-down agreements with GM, the automaker said.
GM created the brand in 1983 in a bid to compete with Japanese automakers on quality and service and to provide car buyers with "no-haggle" pricing.
Saturn sales had peaked in 1994 and GM had attempted a turnaround of the brand earlier this decade under then product chief Bob Lutz.
Struggling to regain its financial footing, GM announced in February that it would either spin Saturn off or close the brand. Penske and GM announced a preliminary agreement on Saturn in June after the U.S. automaker filed for bankruptcy.
GM and Saturn had said they expected to complete the deal by the fourth quarter.
Saturn sales have dropped 59 percent through August from a year earlier amid the uncertainty about the brand's future. Its best-selling models are the Vue small SUV and the Aura sedan.
Penske shares were trading at $17.29 Wednesday afternoon, down from $19.18 at the close.
(Additional reporting by Soyoung Kim and Kevin Krolicki; Editing by Leslie Gevirtz, Bernard Orr)
WASHINGTON – Nearly one in three borrowers who applied for a mortgage last year was denied as lenders kept their standards tight as the mortgage crisis accelerated, the government reported Wednesday.
In its annual look at mortgage practices among lending institutions, Federal Reserve said the denial rate for all home loans was about 32 percent last year — about the same as in 2007, but up from 29 percent in 2006. The denial rates for blacks and Hispanics were more than twice as high as the rate for white borrowers.
The report highlights massive changes in the lending industry after the housing market bust. Overall loan applications were down by a third from a year earlier, and were half the level in 2006.
Loans backed by the Federal Housing Administration soared to 21 percent of all loans made last year from less than 5 percent in both 2005 and 2006.
For black borrowers, more than half of all loans were FHA-insured, more than triple a year earlier. For Hispanics, that number shot up to 45 percent, more than four times as high as in 2007. That was troubling news for consumer advocates.
"I'm hard-pressed to believe that many of those borrowers couldn't have been served by the private sector," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington. "It implies that the industry has shut down in serving this population."
High-priced loans with rates at least 3 percentage points above the rate for prime loans, shrunk to nearly 12 percent of the market from a high of 29 percent in 2006. But that figure mainly reflects unusually low interest rates during the recession, the report said, and understates the disappearance from the market of high-priced subprime loans made to borrowers with poor credit.
Last year, about 17 percent of blacks and 15 percent of Hispanics got high-priced loans, compared with about 7 percent of whites. Even controlling for factors that might widen that discrepancy, there still a gap of almost 8 percentage points between the number of blacks and whites who got high-cost loans.
The mortgage industry says lenders are not discriminating by race, and are making adjustments based on borrowers' risk profile — such as their credit score and the size of their down payments.
"You still have a certain degree of risk-based pricing in the market," said Jay Brinkmann, the Mortgage Bankers Association's chief economist.
Lenders also scaled back dramatically on the amount of so-called "piggyback" mortgages, in which borrowers used second mortgages to avoid making a 20 percent down payment. Those loans have virtually disappeared from the market: Only 98,000 were made last year, down from 1.3 million annually in 2006.
The data, collected from nearly 8,400 lenders, is required under the Home Mortgage Disclosure Act of 1975.