Congress posed questions on the role ratings agencies would play post-recession, but found in a hearing Wednesday, the answers hinge on who you ask.
The most pressing challenge comes from the ongoing debt ceiling crisis. Standard & Poor's President Deven Sharma stressed to lawmakers that the U.S. must solve the growth of its debt over the long-term. He signaled that if lawmakers skirt the current debt ceiling debate with short-term proposals, the credit agency would downgrade the nation's gilt-edged ratings.
"Having the dollar as a global reserve brings some benefit as well as some creditworthiness," Sharma said. "But the more important issue is the long-term growth rate of the debt as well as the deficit. That is the more important issue at hand."
But others at the hearing grew concerned over how a handful of companies can shape the outcome of this and future crises. New rules under the Dodd-Frank Act revealed even more questions.
The Securities and Exchange Commission is removing references to ratings agencies in its rules and installing new requirements for the network of nationally recognized statistical ratings organizations. Some believe the new regulations would shut out smaller firms such as Rapid Ratings International and heap even more responsibility, but less liability, upon the larger companies as S&P, Moody's Investors Service and Fitch Ratings.
"Until there are benefits that outweigh the costs, we will build our business outside the NRSRO network," said Rapid Ratings CEO James Gellert.
A recent report from National Bureau of Economic Research charged these firms with having a hand in the mortgage finance bubble, but the credit rating agencies may have still escaped regulatory scrutiny under Dodd-Frank.
Now, these same firms have warned the U.S. of a possible downgrade and the potential financial chaos that would cause, including boosted interest rates across the board. Rates remain low for mortgages. Any increase, some believe, would constrict already weakened demand.
Jules Kroll, executive chairman of the Kroll Bond Rating Agency, questioned why these companies can have such pull over entire sovereign nations.
At S&P, for instance, 100 analysts rate debt for 136 countries – a lot of responsibility, Kroll said, for an organization that failed to recognize the collapse of the mortgage-backed securities market.
"They wield all sorts of power. They can put ratings on entire sovereign countries, and with no liability," Kroll told the subcommittee. "I don't think CRAs have the wherewithall, the intelligence range, or the experience to be doing ratings on hundreds of countries around the world. I question if this is the job for the private sector."
Congress remains mired in debate on resolving the debt ceiling crisis. But when pressed, Sharma said S&P analysts have been in "ongoing" communication with officials at the Treasury Department and Secretary Timothy Geithner. While Sharma could not comment on one particular plan, he said there are elements of some proposals that would reduce U.S. debt level to an appropriate range in order to avoid a downgrade.
Sharma was then asked point blank if he thought Washington would allow the U.S. to default on its debt.
"Our analysts don't believe they would," Sharma said.
But the constant undertone throughout the hearing was the troubling concern of placing so much influence in the hands of so few. Even Kroll admitted he would not be comfortable having his business overseeing such a responsibility.
"Throughout history, we've seen a constant activity of being a day late and a dollar short. Is this new news?" Kroll said. "We are not qualified to do this, and I question if private enterprise should be in this business."
Write to Jon Prior.
Follow him on Twitter @JonAPrior.
