CREDIT RATING AGENCIES AND THE FINANCIAL CRISIS ...

90supposed to, otherwise I have no intention of providing guess ratingsfor anybody. And there were no responses to the memo, so wejust let it die. We never gave them a rating.Mr. TIERNEY. Never gave them a rating?Mr. RAITER. No.Mr. TIERNEY. Good for you. Mr. Egan what is your reaction tothat scenario, that someone would send an e-mail to Mr. Raiter demandingthat he give a rating without the back up materials?Mr. EGAN. I think it is reasonable if you are being paid byissuers and unreasonable if you have the investor’s interests atheart.Mr. TIERNEY. Why wouldn’t the government just get out of thebusiness of certifying agencies like yours? Why wouldn’t we justsay that this is too fraught with errors and problems and risks. Weare going to get out of the business of certifying agencies and wewill establish our own standards. Then you can do what you wantto do. We can’t put you out of business. It would be an overstepto do that. But there is no reason we should certify you as a government.You give your ratings and let the market decide whetheror not you are worthy of them and sort out of conflicts issue, butwe’re not going to do it anymore. We’re going to step in and be theregulators instead of contracting it out to you. Why wouldn’t we dothat?Mr. RAITER. If I could just—there is no reason why under thecertain circumstance that you don’t take those steps. There is a bigdifference in this market between the rating at issue and the surveillance.A breakdown occurred both in the proper sizing of therating at issue. But surveillance has been atrocious. And theNRSRO designation that has been provided to the three majors,and A.M. Best and maybe others, it doesn’t distinguish across whatkind of ratings you can give. If you get rid of that designation, youcan keep the investment policy guidelines that say if you are theinvestment manager, you have to get two ratings. But let the responsibilityfall on the investor to find the best rating, and then tofind the best surveillance that would keep them informed on atimely basis as to how that rating is performing.Mr. TIERNEY. Wouldn’t that be the better course? Mr. Fons,would you agree?Mr. FONS. Yes, I advocated that in my oral testimony that theNRSRO designation should be abolished.Mr. TIERNEY. Mr. Egan, do you agree as well?Mr. EGAN. The government has been part of the problem in thisindustry. It took us 12 years to obtain the NRSRO——Mr. TIERNEY. Excuse me, but when you say the government ispart of the problem, are you referring to the SEC?Mr. EGAN. The SEC, exactly. It took us 12 years to obtain anNRSRO, and yet there is proof from the studies of Federal ReserveBoard of Kansas City and from Stanford and Michigan that pointedout that we had much better ratings than S&P and Moody’s butyet there is still no response.In that time period, what has happened is that because the governmentonly recognized those few rating firms and continued thisunsound business model, it enabled the issuer-compensated ratingfirms to grow much faster, much further, and have a more consoli-VerDate 11-MAY-2000 12:35 Aug 24, 2009 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 U:\DOCS\51103.TXT KATIE PsN: KATIE