Credit rating companies have long seemed the Wall Street equivalent of the New York Yankees: Controversial but virtually unbeatable. Again and again, disgruntled investors have taken the raters to court — and lost.
Now facing a crackdown for their role in the financial crisis, the raters worry that Congress will leave them vulnerable to a barrage of lawsuits that are harder to defend. In response, the raters are stepping up their game on Capitol Hill. They are breaking their own spending records as they deploy some of the heaviest hitters in lobbying and lawyerly persuasion.
Financial reform legislation now making its way through Congress includes provisions that would make it easier for investors to sue the companies when they award top marks to bonds that turn out to be toxic. Investors rely on rating companies to judge the quality and safety of bonds by assigning the investments a letter grade. During the financial crisis, people lost billions on highly rated subprime investments.
Recent disclosure reports filed by lobbyists and their clients show that in 2009, the top rating companies —Standard and Poor’s, Moody’s and Fitch — collectively spent almost $4 million on lobbying. That’s a record for the rating industry, and about 56 percent more than in 2008.
Of the big three raters, S&P spent the most last year on lobbying — about $2.2 million — though that amount includes some lobbying for other business units of S&P parent company McGraw-Hill.
And S&P is not missing an opportunity to pitch their cause: Representatives for S&P have had “direct meetings” with most all 23 senators on the Senate banking committee or their staff members, Ted Smyth, a McGraw-Hill vice president, told the Huffington Post Investigative Fund.
Smyth wouldn’t say which, if any, senators have been receptive to S&P’s attempts to kill the increased liability provision. “We’re hearing from Democrats and Republicans who don’t want unnecessary lawsuits” for the ratings companies, he said.
S&P’s lobbyists also have taken their case to the White House, Securities and Exchange Commission, FDIC, Federal Reserve, the Treasury Department, and even the Government Accountability Office, the investigative arm of Congress, records show.
In July 2009, McGraw-Hill hired the Podesta Group and its owner, Tony Podesta, one of Washington’s most influential lobbyists, to tackle “liability provisions in credit rating agency reform,” the group’s lobbying disclosure reports show. Tony’s brother, John Podesta, was President Clinton’s chief-of-staff and co-chairman of President Obama’s transition committee.
S&P also has hired the lobbying firm Nappi and Hoppe, which represents an array of financial interests including the Chamber of Commerce. A principal in the firm, Douglas Nappi, was chief counsel to the Senate banking committee from 2003 to 2005.
For years, the big three credit raters have faced lawsuits from state attorneys general and investors who claim to have lost billions by relying on credit ratings. S&P alone now faces roughly 50 lawsuits. The investors typically accuse the raters of awarding inflated safety grades to dangerous investments. But the raters, who argue that ratings are only an opinion and that investors assume their own risk, remain undefeated in court.
Many congressional Democrats are trying to break that winning streak.
A bill passed late last year in the Democratically controlled House would make it easier to sue the raters. Instead of having to prove that a rating company committed fraud, investors would only have to show the raters were “grossly negligent” – a lower standard.
Floyd Abrams, a renowned First Amendment attorney who has represented Standard & Poor’s for more than 20 years, said in an interview last year that switching to a so-called negligence standard could “be a very major threat to rating agencies being able to go about their business.”
Senate Democrats didn’t go quite as far as their colleagues in the House. The Senate banking committee last month approved a bill allowing investor lawsuits only when the facts strongly infer that a rating company “knowingly or recklessly failed to conduct a reasonable investigation” of the investments before giving them a grade.
S&P’s Smyth objects even to the weaker Senate provision. He said the language is vague and subject to interpretation by the judiciary and juries. “This ill defined provision introduces a degree of uncertainty,” said Smyth. “It’s like in football, they’re punting” to the courts. Raters also complain that other market participants such as accountants face less onerous standards.
The ultimate shape of the legislation won’t be known until later this summer. Meanwhile, McGraw-Hill’s in-house lobbyists are reaching out to key Republican lawmakers on the banking committee.
One McGraw-Hill lobbyist, Cynthia Braddon, met last month with Republican Sens. Bob Corker of Tennessee and Judd Gregg of New Hampshire. Corker joined the committee’s chairman Christopher Dodd (D-Conn.) in writing many of the bill’s provisions. Gregg, along with Democratic Sen. Jack Reed of Rhode Island, helped construct the rating agency provisions.
At the March meeting, Braddon pushed Corker and Gregg to oppose the committee’s provision that would make it easier to sue the raters, according to an e-mail Braddon sent to Hill staffers on March 22, first reported by Bloomberg. That provision “remains a bone of contention,” Braddon’s e-mail said.
Smyth said that Braddon’s e-mail “miscommunicates our bipartisan approach to the Bill.”
According to one congressional source, nothing was agreed to at Braddon’s meeting with Corker and Gregg. The committee approved the bill along party lines, with Corker, Gregg and the committee’s other Republicans voting against it.
In a statement released Wednesday, Reed attacked the March meeting as a “cynical attempt by Wall Street lobbyists to kill Wall Street reform before it has a chance to see the light of day.”
Reed called on Republicans to ignore S&P’s attempts to influence the bill. “I hope these overtures from the banking industry will be resoundingly rejected and that we can get several Republican senators to join us in passing comprehensive Wall Street reform that increases transparency and protects taxpayers,” he said.
Gregg’s office did not return a call requesting comment. Corker’s spokeswoman, Laura Herzog, said in e-mail: “Sen. Corker believes credit rating agencies were a big part of the problem and need to be part of the reforms.”
The rating agencies say they support most proposed reforms, including an SEC office to oversee them.
When faced with previous threats from Capitol Hill, the rating agencies mostly have fended them off. An Investigative Fund review last year of congressional testimony, SEC documents and lobbying reports revealed that the raters frequently have quashed or watered down potential government oversight by arguing that, much like a newspaper editorial, ratings are protected by the constitutional right to free speech.