CREDIT RATING AGENCIES AND THE FINANCIAL CRISIS ...

91dated industry than it would be otherwise. Think the equity researchindustry. There are a lot of equity research shops out there.In the case of the rating industry, as Jim Graham said, it is a 2 1 ⁄2firm industry. That was before we got the NRSRO. Now he putsus in the category.But I think that what has to happen at this point—clearly thereis a breakdown—what has to happen is something that gives confidencefor the investors that are not in the market and they happento be in many cases non-U.S. investors. The Asian and Europeaninvestors, to get back in the market. Because they can’t dothe work themselves. They have to be able to rely on a credibleagent to be able to properly assess credit quality. You are not goingto change significantly S&P and Moody’s and Fitch’s way of doingbusiness. You can’t do it. These are rating opinions; they will remainrating opinions. What is needed is an alternative businessmodel to be more or less on the same plane so that people havesome confidence and get back into the market and get credit flowingagain.Mr. TIERNEY. I think you can change the nature of that modelbecause we can set standards at the Securities and Exchange Commissionsaying that we don’t accept it when the issuer makes thepayments as opposed to the investors.Mr. EGAN. We’ve argued for that——Mr. TIERNEY. Rather than having the government stepping inand protecting that conflict and then leaving it there. I think theidea is right. Mr. Raiter is right. Set the standards and leave yourstandards out there, but don’t start picking winners and losers.Chairman WAXMAN. Thank you, Mr. Tierney. Ms. Watson.Ms. WATSON. Thank you, Mr. Chairman. On July 10, 2007,Moody’s downgraded over 450 mortgage-backed securities. It placedanother 239 on review for possible downgrade.Although many of these bonds were not rated highly to beginwith, Moody’s had awarded them its highest rating of triple-A.The committee has obtained an internal Moody’s e-mail writtenthe next day, July 11, 2007. I think it is going to be up on thescreen in a moment. And this e-mail was written by Moody’s vicepresident, who took multiple calls from investors who were irateabout these downgrades. And I would like to get your reaction tothese comments.First the e-mail describes a call with an investor from the companyPIMCO and the vice president writes: PIMCO and othershave previously been very vocal about their disagreements overMoody’s ratings and their methodology. He cited several meetingsthey have had questioning Moody’s rating methodologies and assumptions.And he feels that Moody’s has a powerful control overWall Street, but is frustrated that Moody’s doesn’t stand up to WallStreet. They are disappointed that this is the case Moody’s has toedthe line. Someone up there just wasn’t on top of it, he said. Andmistakes were so obvious.So this goes to Mr. Fons. PIMCO is a very highly regarded investormanagement. It’s run by Bill Gross, who is widely regarded asone of the Nation’s most experienced fixed-income investors. Doesit surprise you, Mr. Fons, that PIMCO would be so critical ofMoody’s?VerDate 11-MAY-2000 12:35 Aug 24, 2009 Jkt 000000 PO 00000 Frm 00095 Fmt 6633 Sfmt 6633 U:\DOCS\51103.TXT KATIE PsN: KATIE