Sept. 26 (Bloomberg) -- The U.S. Securities and Exchange Commission's probe of credit-rating companies is concentrating on whether Wall Street pressured firms such as Standard & Poor's and Moody's Investors Service to give top rankings for subprime- mortgage bonds, SEC Chairman Christopher Cox said today.

The regulator is looking for evidence the firms were ``unduly influenced'' by issuers and investment banks that sold the debt, Cox said in a Senate Banking Committee hearing in Washington. He first announced in August that the SEC would examine the rating process in response to turmoil in the subprime market.

Senator Richard Shelby, the senior Republican on the committee, said loans to borrowers with poor credit histories were fueled by a conflict of interest at the ratings companies, which were paid to evaluate securities by firms that wanted to sell them. Lawmakers and investors have faulted the rating services for grading subprime securities too highly and failing to act quickly when borrowers began defaulting on loans backing the bonds.

S&P, the largest ratings company, is preparing to hand over documents to the SEC related to the probe, Vickie Tillman, executive vice president of credit-market services at the New York-based firm, said in a statement prepared for the committee.

Moody's Corp., the New York-based parent of Moody's Investors Service, rose $1.32 to $47.39 in New York Stock Exchange composite trading. The stock has fallen 31 percent this year on concern that the decline in demand for mortgage-related securities will hurt the company's rating revenue. McGraw-Hill Cos., parent of S&P, gained $1.79 to $49.73 and is down 27 percent this year.

Understated Risks

Cox appeared with Tillman and Michael Kanef, group managing director, asset finance group, of Moody's Financial Services, the second-largest ratings company. The event precedes a hearing tomorrow by a subcommittee of the House Financial Services Committee, chaired by Representative Paul Kanjorski, a Pennsylvania Democrat.

Lawmakers today chastised S&P and Moody's for waiting too long to downgrade the subprime bonds. Some securities had fallen more than 50 cents on the dollar, as defaults on the underlying mortgages rose, before their credit ratings were reduced.

Shelby, an Alabama Republican, said the companies' methods for rating mortgage-backed securities are ``obviously flawed and conflicted in many, many ways.''

``It seems to me that money is trumping ethics in this area of ratings,'' added Shelby.

Winning Fees

Banking Committee Chairman Christopher Dodd has said the ratings companies may have understated the risks of the securities to win fees for rating the debt. The companies also help financial institutions package debt in a way that will receive certain ratings, he said.

``These loans were facilitated by Wall Street with the support of credit-rating agencies,'' Dodd, a Connecticut Democrat, said in a statement today. ``These loans are now defaulting and going into foreclosure at historically high rates, leading to the collapse and the loss of confidence.''

Dodd didn't appear at the hearing, which was chaired by Jack Reed, a Democrat from Rhode Island.

Senator Jim Bunning, a Republican from Kentucky, described the process as ``like a movie studio paying a critic to review a movie and then using a quote from his review in the commercials.''

`No Evidence'

Moody's and S&P executives disputed the claims.

``There is no evidence, none at all, to support this contention with respect to S&P,'' Tillman said.

S&P doesn't structure debt transactions, and the company's criteria for ratings are ``absolutely transparent,'' Tillman said. There isn't any collaboration between S&P and debt issuers on constructing mortgage-backed securities, she said.

``We have an open dialogue with investment bankers,'' Tillman added. ``We don't tell them how to make it better. That's up to them.''

In his prepared testimony, Kanef of Moody's said the company has ``successfully managed related conflicts of interest and provided the market with objective, independent and unbiased credit opinions.''

Suit Filed

The criticism came the same day as a Moody's shareholder filed suit in New York, accusing the firm of not revealing it gave inflated credit ratings to bonds backed by subprime mortgages.

The suit was filed by Teamsters Local 282 Pension Trust Fund, which said it lost money on Moody's shares after the company disclosed July 11 that it was downgrading 399 mortgage- backed securities issued in 2006. The fund asked for class- action status for the suit to bring in other investors.

Moody's today put three new executives in charge of global ratings, seven weeks after separating its credit ratings unit from marketing and analytics to help underscore the independence of its opinions.

Michel Madelain was named as head of global fundamental ratings; Noel Kirnon will be in charge of global structured- finance ratings and U.S. public finance ratings; and Andy Kimball will be chief credit officer and chairman of credit policy, Moody's said today in a statement.

More Authority?

Senators asked Cox whether the SEC needs more authority over credit raters, such as the ability to shape their methodology. The regulator currently monitors firms for conflicts of interest and makes sure their methods are consistent.

``You and the Congress have struck the proper balance here,'' and changes aren't yet warranted, Cox said. Ratings models need frequent updating, and if the government defined them, ``there would be no innovation,'' he said.

Cox also said it's too early to say whether the SEC needs more power to revoke firms' rights to rate securities if their rankings prove to be wrong.

As default rates on subprime mortgage rose to the highest level in five years during the second quarter, S&P and Moody's reduced ratings on at least 500 securities and tightened standards for rating new issues.

Warnings

Investors failed to heed warnings by S&P that defaults on home loans were becoming a concern, Tillman said, echoing comments made last week by Terry McGraw, CEO of New York-based McGraw-Hill.

``S&P has spoken out and taken action early and often on subprime issues,'' Tillman said. Even so, the worst slump in the housing market in 16 years was ``both more severe and more precipitous than we had anticipated,'' Tillman said.

A total of 171 subprime-mortgage bonds issued last year with investment-grade ratings were downgraded within 12 months, according to a report yesterday by Credit Suisse Group. That compares with just 11 previously, the Zurich-based firm said.

Moody's said it receives no fees for helping clients structure their securities.

``Moody's does not structure, create, design or market securitization products,'' Kanef said. ``We do not have the expertise to recommend one proposed structure over another, and we do not do so.''

To contact the reporters on this story: James Tyson in Washington at jtyson@bloomberg.net; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: September 26, 2007 21:06 EDT