Competition blamed for high ratings for risky investments

WASHINGTON - Former credit rating industry executives told a Senate panel Friday that competitive pressures and poor internal communications led their analysts to award safe ratings to risky investments.

The highly rated investments turned out to be toxic, contributing to the financial crisis.

Sen. Carl Levin (D-Mich.), chairman of the Permanent Subcommittee on Investigations, which is investigating the causes of the financial crisis, proposed Friday that Congress should address a conflict of interest that arises from credit rating agencies being paid by the same banks whose bonds they rate.

"It's like one of the parties in court paying the judge's salary," Levin said, adding that the financial regulatory overhaul the Senate will take up Monday should include a solution to that problem.

Frank Raiter, a former managing director for Standard & Poor's, said there was a "disconnect" between senior managers and the analytical managers responsible for assigning bond ratings. He said that, along with weak government regulation, led agencies to award high ratings to risky investments.

Raiter said management placed increasing pressure on analysts to earn fees by attracting business from banks. He said many former colleagues had quit after clashing with management.

Moody's Investors Service cared more about losing market share than potentially committing "securities fraud," even as the rating company realized it needed to step up downgrades on subprime mortgage bonds, the former head of a structured-products group told the panel.