By Yali N’Diaye

WASHINGTON (MNI) – For those looking for hints on the U.S.
sovereign rating in the context of the debt ceiling and deficit
reduction debate in prepared testimonies during a hearing on credit
rating agencies, it is not there.

Instead, rating agencies, while disagreeing on aspects such as the
competition landscape, reaffirmed the need to remove regulatory reliance
on ratings.

Representing the investor’s side, however, Colorado Public
Employees’ Retirement Association General Counsel & COO Gregory Smith
warned this cannot be achieved, at least in the short term.

Instead, he is calling for a greater liability from rating
agencies, while stressing the difficulties to find substitutes to their
ratings.

Colorado PERA invests more than $40.2 billion in assets, including
approximately 22% in domestic fixed income securities.

“We are currently in the process of consulting with internal fund
managers and outside experts in order to identify appropriate
alternative measures of risk,” Smith said in his prepared testimony.

However, “to date no single appropriate substitute for a robust,
objective evaluation of credit risk has yet been discovered,” he added
during a House Financial Services Committee hearing on ‘Oversight of the
Credit Rating Agencies Post Dodd-Frank.’

As a result, he cautioned against “hasty efforts to eliminate
credit ratings prior to the development of effective substitute tools.”

Instead, rating agencies, small and big, want that regulatory
reliance removed, a step that is mandated by the Dodd-Frank Act.

And the rating agencies’ regulator — the Securities and Exchange
Commission — is just doing that, or at least trying, and has proposals
out for comment.

Overall, “the Commission has increased its examination focus on”
nationally recognized statistical rating organizations,” the agency’s
Division of Trading and Markets Deputy Director John Ramsay told
lawmakers.

He reaffirmed that the SEC “is on track this year to complete an
examination of every NRSRO.”

Witnesses at the hearing also include on the regulatory side
Federal Reserve Division of Banking Supervision and Regulation Senior
Associate Director Mark Van Der Weide, and Office of the Comptroller of
the Currency Senior Deputy Comptroller and Chief National Bank Examiner
David Wilson.

While Fitch Ratings is not represented, rating agencies include
Standard & Poor’s President Deven Sharma, Moody’s Commercial Group
Global Managing Director Michael Rowan, Rapid Ratings Chief Executive
Officer James Gellert, and Kroll Bond Rating Agency Chairman and CEO
Jules Kroll.

University Stern School of Business Professor of Economics Larry
White also testifies.

Both Moody’s and S&P expressed support for the Dodd-Frank reforms,
ensuring they are spending a lot of time and money to implement them.

In fact, S&P will spend over $90 million this year alone to comply,
in addition to more than $300 million already spent over the past five
years, Sharma said.

One of the reforms particularly supported by rating agencies — in
line with their opposition to being named ‘experts’ with the liabilities
coming with the title — is the removal of regulatory reliance on
ratings.

“Moody’s has long-supported removing references to credit ratings
in regulation,” Rowan said.

Still, Moody’s and S&P both warned against regulations that would
be too intrusive.

“It is critical that new regulations preserve the ability of NRSROs
to make their own analytical decisions without fear that those decisions
will later be second-guessed if the future does not turn out as
anticipated or that, in publishing a potentially controversial view,
they will expose themselves to regulatory retaliation,” Sharma said.

“We have cautioned against regulating the substance of how rating
agencies determine credit ratings,” Rowan added.

On the issue of competition, while both Moody’s and S&P defended
its importance, smaller players like Rapid Ratings and Kroll Bond
Ratings stressed the barriers to entry remain high despite regulators’
pledge to encourage competition.

Going even further, Rapid Ratings warned that Dodd-Frank is instead
discouraging competition and adding burden on small players “while
providing little more than an administrative hassle to the Big Three.”

For Rapid Ratings’ Gellert, “As we arrive at the one year
anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank) we continue to face essentially the same ratings
landscape as one year ago.”

“The Big Three ratings firms, S&P, Moody’s and Fitch, have had
banner years given record bond issuance for most of the year and their
influence is undiminished, competitor NRSROs have even more challenges
than ever before, and non-NRSRO rating agencies, like Rapid Ratings,
watch the disincentives to an NRSRO application mount ever higher,” he
added.

To the point that Rapid Ratings does not want to become a
registered rating agency.

Still, when it comes to remove regulatory reliance, Gellert rallies
to S&P and Moody’s cause.

“We believe that the removal of statutory (laws) and regulatory
(administrative requirements) references is one of the key tenets to
ultimate change in the ratings industry,” he said.

A path that even White advocates. While the search for greater
regulation is understandable, the economics professor said, it is
“misguided and potentially harmful.”

Instead, eliminating regulatory reliance is a better road, he
concluded.

** Market News International Washington Bureau: 202-371-2121 **

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