April 6 (Bloomberg) -- U.S. Senator Jack Reed criticized Standard & Poor’s for a “cynical” attempt to halt reform by asking Republican lawmakers to fight legislation that would make it easier to sue credit-rating firms.
“The same companies that helped cause the financial crisis are now trying to block reform,” Reed, the Rhode Island Democrat who drafted the litigation provision, said in a statement today. “This cynical attempt by Wall Street lobbyists to kill Wall Street reform before it has a chance to see the light of day must be resoundingly rejected.”
Reed made his comments in response to a March 22 e-mail written my McGraw-Hill Cos. lobbyist Cynthia Braddon, a copy of which was sent to congressional staffers and obtained by Bloomberg News. She said in the e-mail that S&P’s parent company was asking Senate Banking Committee members Bob Corker of Tennessee and Judd Gregg of New Hampshire to help defeat a proposal that may make judges less likely to dismiss lawsuits against ratings firms.
Reed and other Democrats on the banking panel approved legislation last month that includes the liability measure as part of a broader plan to tighten regulation of Wall Street. Republicans could force Democrats to drop the provision in exchange for votes needed to ensure passage of the rules overhaul, according Braddon’s e-mail.
Democrats “cannot bring this bill to the Senate floor” unless it’s supported by Republicans, Braddon wrote in the e-mail. The liability of credit-rating companies “remains a bone of contention,” she wrote.
S&P spokesman Edward Sweeney said the company had no immediate comment on Reed’s statement. Braddon didn’t return a phone call. Corker’s spokeswoman said he wasn’t available to comment and Gregg’s office didn’t respond to a request for comment.
Public pension funds say S&P and Moody’s Investors Service helped cause the global financial crisis by giving top rankings to mortgage bonds after receiving fees from banks to rate the assets. On March 31 a federal judge in New York dismissed a suit accusing S&P and Moody’s of defrauding investors who relied on their ratings before buying $63 billion of securities.
A similar suit filed by investors who bought $100 billion of mortgage-backed securities was dismissed in January.
Without legislative changes, litigation against a credit-rating firm has little chance of succeeding, said Michael Perino, a securities-law professor at St. John’s University in Queens, New York. To keep suits from being dismissed, plaintiffs typically have to present facts suggesting defendants knowingly misled investors, Perino said.
“It’s going to be virtually impossible to hold the credit-rating agency liable,” he said.
Under legislation approved by the U.S. House in December, investors would have to show only that a credit-rating company was “grossly negligent” in order for litigation to proceed.
The Senate Banking Committee measure approved March 22 would let investors prevent a suit’s dismissal by showing a ratings firm “knowingly or recklessly” failed to conduct a “reasonable” examination of what the securities underwriter stated about an offering.
If the full Senate approves a bill including a liability standard, it would have to be reconciled with the House version before President Barack Obama could sign it into law.
Reed and Representative Paul Kanjorski of Pennsylvania, who’s also a Democrat, say making it more likely that credit-rating companies have to pay legal damages will encourage them to do a better job assessing risk.
Catherine Mathis, a spokeswoman for S&P, said making it easier for investors to win lawsuits will benefit plaintiffs’ attorneys more than bond buyers by encouraging lawsuits every time a rating company changes its ranking. S&P and Moody’s would respond by rating fewer offerings, making it harder for businesses to raise debt, she said.
“When you think about the economic impact that it could have, particularly when we are trying to grow and recover from what has been a very difficult period, it could have a significant effect,” Mathis said.
S&P supports aspects of the financial-reform legislation that increase transparency, accountability and oversight of credit-rating companies, including a proposal to create an office within the Securities and Exchange Commission to regulate the industry, Mathis said.
Moody’s spokesman Michael Adler, when asked about the liability provisions, said Congress should avoid measures that lead to “unintended consequences for the market.”
S&P and Moody’s have been faulted by regulators and lawmakers for maintaining AAA ratings on mortgage bonds months after home-loan defaults surged in 2007.
McGraw-Hill and S&P “have long been committed to working with Democrats and Republicans in support of financial reform,” Ted Smyth, a McGraw-Hill executive vice president, said in an e-mailed statement. The companies will work with both parties to uphold provisions enacted through the Private Securities Litigation Reform Act, a 1995 law to reduce the number of frivolous lawsuits filed against corporations, Smyth said.
Braddon, in her e-mail, said McGraw-Hill urged Corker and Gregg to oppose the Senate’s liability standard during a March 22 meeting on the rules overhaul proposed by Banking Committee Chairman Christopher Dodd, a Connecticut Democrat. Corker and Gregg chose not to comment before the panel passed Dodd’s bill over Republican opposition.
Trying to persuade lawmakers to defend credit-rating firms is a risky step, Braddon said in her e-mail. Anytime someone brings up S&P or Moody’s, there’s a chance it will foster more debate about how far Congress should go in reforming an industry vilified by investors.
“We are also cautious that they do not, at the same time, use their statement to highlight other problems” caused by credit-rating companies, Braddon wrote in the e-mail. That could “fan the flames of further debate, amendments or behind-the-scenes agreements,” she wrote.
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