>> one of the things that is a part of that was there was a

dean to be too much dependence on the rating agencies. and the market, particularly in some of the financial institutions. the dodd-frank asked the references to those ratings be really expunged, and other agencies, the regulators would come up with new criteria for measuring risk that was not necessarily tied to the rating agencies. one of the things we want to hear from our regular should a is where we are in that process. the other thing that is still of concern to some folks is the fact there still continues to be a concentration in just three of those agencies. between moody's and standard & poor's and fitch that the cover but 90% of the ratings. 90% of the revenue. some people are concerned that access for other entities become in rso's is limited.

particularly when you look at some of the regulation that is coming out and making a more and more burdensome and more difficult for the first to come into the. i think we will hear something about that today. also of interest to me is the fact that when we looked at the fact that some people say that we ended too big to fail with dodd-frank. some of us do not believe that that actually ended too big to fail, but many of us somewhat believe it probably contributed to furthering too big to fail. when you look at the major financial institutions in this country, a lot of people thought that they should be smaller. after dodd-frank what we're seeing is that many of these institutions are actually larger. and what we also now see within the rating industry is that there still a reward for being considered one of those systemically risky financial

institutions. and, in fact, that these institutions are getting somewhat of a pop or upkicks over other financial institutions which may, in fact, have a better baseline financial rating. so these are some of the things we want to look into today. my guess is some of my colleagues wanted to discuss something that is relevant to these times, and that is the role of the rating agencies as it pertains to the united states sovereign debt. i suspect there will be some questions along those lines as well. but i look forward to a very robust during. this is a very important part of our economy. a lot of people still put a lot of credence into these ratings. some people feel like they have lost their credibility. and as we're moving forward one of the things we feel will be extremely important is restoring a little bit more certainty in the marketplace.

and so with that, i will then recognize my good friend, the ranking member, mr. capuano. >> thank you, mr. chairman. first of all, welcome to all our panelists. i know that a lot of people will want to talk about the removal of references. i'm interested in the. i more interested in other aspects. it's well known by everybody, all the testimony, majority and memo today that the faulty ratings contributed significantly to the recent economic problems. we all know that. it's accepted. there's no debate. i'm particularly interested in where we are now and how we go for. i'm particularly interested in how the budgetary constraints might have impacted some of your agencies relative to implementing some of the dodd-frank and even in implement dodd-frank whether it is hurt other parts of your activities. i think that's a very important aspect of this. it doesn't do any good of the greatest regulations if you

cannot enforce them for or receiving. i'm interested in the overall report as to what the credit rating agencies are doing their job. whether we should be concerned further. i know things can change but whether they're finally done what we all hoped and wanted them to do. from what i said i think i've done a better job. more reliable. i want to your opinion. i'm also interested in your opinions as to how we are doing with the bill, like thibault, particularly a major bill. i've always known, we've always known any major bill no matter how good or bad, it needs to be tweaked as you go for. what can we do better, what should we be doing we didn't think of? the truth is our economic situation right now with the debt limit is the crisis at the moment. hopefully we'll pass that in the next few weeks or so but that doesn't solve all our problems. i think everyone here knows that. we have other things you have to address and other economic

issues that are related to the credit rating agencies. if they do their job i believe our entire system will work together. that's what i'm interested in hearing. >> i thank the gentleman. now recognize the chairman of the full committee, mr. bachus. >> i think the chairman for convening this hearing to examine the future of credit rating agencies, post-dodd-frank. the credit rating agencies failed spectacularly in the years leading up to the financial crisis. a government seal of approval for credit rating agencies led to immense pricing of risk and the subsequent collapse and market confidence. house republicans identify this as a significant problem and propose removing references to credit rating agencies -- credit ratings and federal statutes. unlike most of our proposals which were rejected by the then

majority, this one was adopted and incorporated into the final legislation with bipartisan support. i commend all members of the committee for that. section 939a of dodd-frank requires all federal agencies to review and replace references to credit ratings and the regulations with alternative measures of credit worthiness. the significance of section 939a cannot be overstated because the provision had overwhelming bipartisan support throughout the regulatory reform debate. i fully expect the regulators to implement it consistent with legislative intent. this provision has been discussed and debated within this committee and on the house floor and senate floor since 2009. if the regulars have concerns prior to dodd-frank's enactment about their ability to develop a suitable alternatives to credit rating, i am unaware of them

have a articulate any of those concerns to members of congress. section 939a is an important step to deemphasize credit rating. the dodd-frank act in some cases lacks consistency in its approach to credit rating. provisions such as section 939 f. works against the intent of section 939a. the franken amendment reinforces significant credit rating by requiring the government to establish a system for the sec to choose a rating agency to evaluate issue were structural financial products. regulations adopted by the sec under dodd-frank appear to also contradict the goals of an earlier credit rating agency reform law authored by our colleague from pennsylvania, mr. fitzpatrick. that was a credit rating agency reform act. which sought to reduce the barriers to entry for credit

rating agency seeking a nationally recognized statistical rating organization designation. however, the 700 -- 517 pages of rules adopted by the sec in may to implement sections of dodd-frank erect new barriers to entry for perspective and rs are owes the sec commissioner kathleen casey stated that these rule may be life-threatening to smaller credit rating agencies. finally, dodd-frank removes the expert liability exemption under the securities act for credit rating agencies. in addition to causing a dislocation in the asset-backed security markets, a new liability standard for the discourages new entries to the rating agency arena. i'm pleased that last week this committee approved legislation authored by the gentleman from ohio, mr. sires, to repeal this counterproductive provision of dodd-frank.

mr. chairman, although shows why today's hearing is very important i look forward to hearing from our witnesses. >> thank the gentleman. now i would like to recognize the vice-chairman of the committee, chairman fitzpatrick, who has done a lot of work in this area and has been a great advocate for making sure that we have more competition. so with that i would recognize the gentleman for two minutes. >> thank you, mr. chairman. thanks for your leadership and convening the hearing. we are already looking forward to the testimony coming from both panels. credit rating agencies have a role to play in a financial system. the promise the system has not always work. especially especially for all the users. in 2006, the chairman indicated i wrote legislation that great rating agency reform act to sign opened the door for more participation and more competition in your industry.

so we began a process that has led to this day. in the interim we had a catastrophic failure in a system that hastened the reform. i think it's striking one of the few bipartisan understandings to come out of dodd-frank was the reliance, that reliance and credit ratings have come to pervasive the statute of dodd-frank institute an additional provision that seemed to contradict our bipartisan agreement. and, in fact, now creates conditional barriers to competition in the industry. it's time we were having this discussion. full faith credit of the united states is on the line. we are at a crossroads will need to decide if will he be economic warnings and get our fiscal house in order, or just continuing the federal government make the easy choices. so i think today's hearing will contribute to that debate as well and i look forward to participating. thank the chairman. >> i thank the gentleman. now i yield one minute to the

gentleman from texas, mr. canseco. >> thank you, mr. chairman. the financial crisis of 2008 reinforce the fact that the largest credit rating agencies carry a tremendous amount of influence over our economy. largely because of a government stamp of approval ratings assigned to securities are nationally recognized statistical rating organizations were used as regulatory benchmarks for determining appropriate capital standards. and rs are owes decide designation investor complacency is when these rating agencies begin to write complex asset-backed securities even though they had never experienced rating such instruments and as we know now, these incidents were not really understood by anybody. in order to help decrease the depends on a few organizations to have such an outsized influence in our financial system, a bipartisan proposal was added to the dodd-frank bill

that required regulators to seize the reliance on credit ratings and instead adopt their own standard credit worthiness. unfortunately, some banking regulators have not fully embraced this commonsense proposal and i have great concern over the impact of their decision. i look forward to hearing from our witnesses today on this very important matter. thank you. >> thank you. >> i thank the gentleman. now the gentleman from new jersey for one minute. >> i thank the chairman for holding this hearing today. the consideration of the regular reform legislation that congress passed last year was very partisan anti-overreach that resulted from that structure is that means restricting our economic growth and limiting job creation. as just one that one significant area bipartisanship that emerged dealt with credit rating agencies. there was broad agreement that investors had become basically over relied on the rating agencies and fail to do their due diligence. so having the, require these

ratings that investors believe that race had a stamp of approval from the federal government. in order to refute this, ranking member franco-german bachus and i drafted language to of all rating required some the statute and regulations. so pleased to see the committee has been in forward on implementing that. i understand changing the old system to a new system can be difficult for all involved. i know it's right mind would have rated we community we can figure out what to make the system work in the future. as we can see by the discussion going on this week surrounding the debt debate, the rating agencies opinion still carry quite a bit of weight. while ratings and play a role in a fight with the credit company, security or even a country, it should not be the sole determined. in conclusion, we must continue to work to lessen investor's reliance on these rating agencies and disconnect any believe the government somehow stands behind their opinions. i yield back. >> thank the gentleman. and now we will go to our panel and remind the panelists

masterful opening statement will be made a part of the record. our first panel, mr. john ramsay, deputy director division of trading and markets come just security and exchange commission. mr. van der weide, senior associate director, division of banking supervision and regulation federal reserve board. and mr. david wilson, senior deputy comptroller and chief national bank examiner, office of the comptroller office of the comptroller of the currency. mr. ramsey, you are recognized. >> chairman of the bar, ranking member capuano, members of the subcommittee, my name is john ramsay and i'm deputy director in the division of trading and markets of the security and exchange commission. thank you for the opportunity to testify on behalf of the commission concerning its oversight of credit rating agencies and the regulatory treatment ratings. the commission first gave her a story sort of rating agencies in 2006 with the passage of the

credit rating agency reform act. which mandated the commission to establish a registration and oversight program for nationally recognized statistical rating organizations, or nrsros. it is important to note the commission is prohibited from regulating the substance of credit ratings or rating agency procedures or methodologies. from 2007-2009 the commission adopted rules under this authority to address conflicts of interest, establish record-keeping and reporting requirements, and require credit agencies to perform data on the ratings the issue. following the financial crisis which highlighted problems in the performance of credit rating agencies, the dodd-frank wall street reform and consumer protection act mandated a comprehensive additional set of rules in this area. in may of this year the commission proposed rules under this new authority. in all of its efforts in this area the commission has tried to achieve three general goals. to address conflicts of interest

in improve the integrity of rating processes and methodologies, to provide more transparency so that investors have more and better information about ratings, and can better compare the performance of rating agencies. and to promote competition in the market for rating agencies. while my written testimony details the commission significant regulatory efforts to date, i would like to highlight just a few of those actions. many of the existing rules are directed to the integrity of the rating process. for example, the commission's rules require rating agencies to have procedures to manage conflicts of interest and that private certain other conflict. the agencies are prohibited from structuring the same products that the rate and employs that participate in determining credit ratings are not allowed to participate in fee negotiations. under the rules we recently proposed, these requirements would be strengthened by prohibiting credit analysts from being involved in any way in

sales or marketing activities. in order to promote greater transparency, the commission's rules require nrsros to make various disclosures about rating history, methodologies, performance statistics among other items. our recent proposals in to strengthen these requirements by increasing the amount of public data and standardizing the way performance information is provided to us to be more useful to investors. in addition each published rating would need to be accompanied by information to make the ratings more understandable and the rating agencies would be required to adopt procedures to clearly define each rating symbol and to make sure that symbols are applied consistently. the commission has sought to improve competition for rating agency services. for example, rules provide a mechanism for rating a to z. that has not been hired to rate the structured finance securities to be able to access the information it would need to rate the security on unsolicited basis. in may of this year the

commission issued a request for public comment as part of effort to complete a study required by the dodd-frank act addressing the process for rating structured finance products, and the conflicts of interest that arise from the way the rating agencies are paid for these ratings. the study will focus specifically on the feasibility of establishing a system in which a public or private utility or self-regulatory organization would've signed agencies to determine ratings for these products. the commission is also seeking to eliminate references to credit ratings in its rules in order to reduce reliance on credit ratings. as required by dodd-frank already this year the commission has proposed to remove numbers will references to credit ratings and to substitute other standards of credit worthiness where necessary. finally the dodd-frank act requires the commission to conduct examinations on each and are -- nrsro and you and to assure report summarizes findings. the staff is currently in the process of completing the first cycle of these exams and i would

be please answer any questions you may have. >> thank you. now mr. van der weide. chairman neugebauer, ranking member capuano, and members of the subcommittee, thank you for the opportunity to discuss section 939a of the dodd-frank help achieve the important goal, section 939a requires all federal agencies to review their regulations for references and requirements related to credit for many years before the introduction of credit rating under federal regulations, investor to use credit ratings to assist them in making investment decisions. credit ratings provide a uniform market driven, third party assessment for creditworthiness of countries, state and local governments and countries. federal agencies later and corporate credit ratings into the right framework in part because of the same attributes. the recent financial crisis,

however, made serious flaws with the methodology and processes around the determination of credit ratings, particularly ratings for structured finance positions. these flaws contributed issues of credit ratings of security under estimate the credit risk of many mortgage-backed securities. investors for their part rely too heavily and uncritically on these for their investment decisions. downward reevaluation of many of the securities between 2007-2009 and the resulting loss of confidence of the accuracy of credit ratings contributed meaningfully to the destabilizing dynamics of the crisis. section 939a is one of the provisions of the statute that intended to address problems of the credit ratings rating agencies. the board has identified 46 references to credit ratings in his regulations. most of these references are in the board the space got requirements. the boards greatest challenge in implementing 939a is complete removing this credit rating

agencies. to protect the safety and sense of individual banking firms and financial stability more broadly, we are striving to develop alternative standards to creditworthiness for use in our capital roles that possesses but not the vices. there are several key characteristics of a good creditworthiness standard. most importantly the standard should be reliably risk sensitive and should effectively measure the relative credit risk of various types of financial instruments. second, the statue result in a consistent and transparent application across different types of financial instruments. third, stand ideally should auto adjust on a timely basis to reflect changes in the credit risk profile instruments and should auto adapter governor financial practices. finally, the standards relatively simple to implement and should not increase regulatory burden for banking firms, particularly smaller banks. credit ratings themselves do not meet all these criteria. in developing good replacements

is the difficult task. since the dodd-frank act was signed into law last july, the board has been working with the occ and the fdic to carry out the 939a mandate. in august 2101 month after the act was passed the banking agencies issued an advance notice of proposed rulemaking. in november of last year the board hosted a roundtable discussion with the other banking agencies, academics and private sector participants to solicit views on this issue. public commenters on our 939a efforts have expressed concern about the mandate. have suggested it could lead to competitive distortions across the global banking system and the domestic banking landscape him and i urge the agencies to develop alternatives that are risk system consistent across banks and easy to implement. we can see -- continue work closely with the other banking agencies. we are considering a number of approaches including those are a lot of market-based indicators

such as bond spreads, approaches that rely balance sheet financial ratios, and approaches that rely on into the assessment for credit risk by banking firms. each of these approaches like the use of credit ratings have strengths and weaknesses. the board anticipates it will propose a name is remove references to credit rating agencies in the near future. the board also has been active in international efforts by the financial stability board and the basel committee to -- although the international financial regulatory into key is working to, but also got a framework continue to incorporate credit agencies in material ways. accordingly we will need to find ways to synchronize our 939a change with the global bank capital accord. the board welcomes input from the public and from them as of the subcommittee on this important issue of public policy. thank you for the chance to describe the boards efforts today to implement 939a and i'm happy to answer any questions. >> thank you.

mr. wilson. >> chairman, ranking member, i appreciate the opportunity to testify about the initiatives the occ has undertaken and the challenges we are facing in our work to implement section 939a of the dodd-frank act. section 939a does record each federal agency to review its regulations that refer to and require the use of credit ratings, and each agency must then modify its regulations to remove any reference to our requirement for reliance on credit ratings and substitute alternative standards of credit worthiness. section 939a also requires each agency to trends matter report to congress and the occ will be 70 that report today. occ regulations affected by this provision includes the interagency risk based capital regulations and also sec specific regulations pertaining to national bank investment

securities activities, securities offerings and international banking activities. the banking agencies risk based capital standards use credit rating agency to determine appropriate capital requirements and design risk weights to securitizations and exposures to qualifying securities firms their credit ratings are also used to sign risk add-ons under the agency's market risk rule and to determine the eligibility of certain things and collateral for credit risk mitigation purposes. section 939a could also significantly affect future implementation of other basel accord capital requirements in the united states. these include the standardized approach for credit risk which relies extensively on credit ratings to assign risk weights as well as 2009 revisions made by the basel committee to enhance and strengthen international risk based capital standards. the occ's investments a few regulations use credit ratings for determine credit quality,

marketability, appropriate concentration levels of investment securities purchased and held by national banks. credit ratings are also referenced and used in our regulations governing securities offerings by national banks and the types of assets federal branches and agencies can hold as a capital a policy deposit. the occ has issued to advance notices of proposed rulemaking to seek input on how to revise our regulations to implement 939a. they sought comment on several approaches for developing creditworthiness standards for agencies risk based capital roles. and these approaches varied in complexity and risk sensitivity. we also issued a similar anp are on alternative creditworthiness standards. the agencies as mark said also hosted a roundtable the session attended by bankers, academics, asset managers, credit rating

staff and others to discuss alternatives to credit ratings to commenters on npr and participants expressed concern on the removal of credit ratings from our regulations and assert their credit ratings can be a valuable tool for assessing creditworthiness. many commenters believe that the simple approaches outlined in the option due to their lack of risk sensitivity create incentives for inappropriate risk arbitrage. however, commenters are also concerned that the more complex and risk sensitive approaches due to the depth and type of analysis that will be required posted disproportionate burden on small banks. commenters also expressed concern certain alternatives could create competitive inequities and inconsistencies with international capital standards established by the basel committee. these comments reflect the challenges that the occ and other federal banking agencies are facing as we work to

implement 939a. we believe that with appropriate operational and due diligence requirements, credit ratings can be one vital factor to consider when evaluating the credit worthiness of financial instruments. in our view, our approach that -- rather than imposing an absolute prohibition on their use, would strike inappropriate balance between the need to address the problems created by the over reliance on credit ratings with the need to enact sound regulations that can be consistently implemented. notwithstanding these challenges, we're continuing our work to revise our regulations to be consistent with section 939a. we are being careful and thorough in order to ensure that the result is not a step backward, ensuring that banks of all sizes conduct their activities in a safe and sound manner, and that reflect sound credit judgment and adequate capital for the risk they take.

thank you. >> thank the gentleman. so, what we perjured testimony, 939a basically says that we're going to move away from the references to rating agencies in our financial institutions as a part of regulatory capital. and mr. ramsey, i think you said that, have you published in have y'all published a definition for your standards of creditworthiness? where all the y'all in that process? >> mr. chairman, we have currently i think propose to remove references from 11 separate rules, or set the rules in some cases, nine different forms. actually just yesterday the commission adopted the removal of ratings as a criterion for so-called short form or

self-preservation. we're already a long the process of adopting some of our proposals. it's tricky because each will have to be looked at individually. the right sort of alternative for creditworthiness is not going to be same in all cases. it has to be sort of calibrated if you will for the purpose of the particular role. >> mr. van der weide, where is the fed in this process? have y'all developed a definition for creditworthiness? >> we are working on that. issued a first proposal on that last summer. we've been engaging over the past year extensive discussion with the occ and the fdic on this topic. part of our particular challenge that is causing us to take a little more time is the core regulations said we have to worry about is the capital rol roles. the bank capital roles i think went on in part to the financial

crisis are extremely important to ensuring the safety and saddest of banks and financial stability of the united states. so we have to be careful of how we amend our capital and take our time to make it sure it gets dumber. capital roles are an area where a fair amount of risk sensitivity is required. it's not an on off switch. investment-grade or not. it requires more work to make sure we had a more granular system like that. other complexities that we're working on an interagency process. there's a number of us working on it. it's not one agency. that will result in a better product again but it will lengthen the process. the final complication that we have the capital roles are negotiated internationally so there is an international bank capital accord which we have been implementing in the united states. and as you know there's tension between the international capital accord which does contain references to ratings and what we're trying to do under 939a. we also need to synchronize our

efforts at the international accord. we are working very hard on it we don't have a concrete proposal to propose at this time but we will in the near future. >> mr. wilson. >> the capital roles are an interagency process, so my answer is very similar to marks. but the other thing in the capital roles in addition to what mark mentioned about we're trying to implement an accord that has been done internationally, and there's extensive reliance on credit ratings at the standardized approach. there's extensive reliance on securitization, but also importantly some of them like especially securitization is very granular. so it's hard to come up with a definition to meet all that granular to put risk weights into buckets like the basel accord. but in addition to that, as i've mentioned with occ specific rules, primarily investment securities. that is more of an on off switch

and we can take an approach and we have proposed an approach similar with the sec is proposing and just having a descriptive standard of creditworthiness. >> appreciate the fact that you're looking at an interagency approach to this, and i think there needs to be some standardization. i think they're stealing your that this process is not moving extremely swiftly. one of the concerns is that i have is that under fsoc, the treasure sector is supposed to provide some leadership to this coordination among the regulars. i would mention that the secretary can we did ask treasury to provide a witness today. this is a second hearing in a row we've had that treasury has elected not to send a representative. so we think it's important for the treasury secretary to be very engaged in this harmonization within the regulatory framework because we

can't go and talk about harmonization, you know, with basel in these other countries if we don't have our own plan. so i would encourage you to make sure that we move along in the process and make sure that happens. i would just close by this interesting concept, just a quick question. so if we were going to expunge that really from our capital roles in some of the other rules, what would be responsive if we just did away with the nrsro designation? mr. ramsey. >> well, i think -- maybe give you background in case -- the nrsro designation has been used for quite some time. it used to be used as sort of an informal no action letter process, which for many years that's the way that agencies were recognized.

>> i'm sorry to interrupt you. my time is unfortunately expire and can you give me the short answer? would you support doing away with with the nrsro designation? >> i guess the short answer is i think there aren't respect be made for and against, but the commission certain hasn't taken a position. >> mr. van der weide? >> the fed also does not have a position on that question. >> could you develop one? >> i will take that back. >> mr. wilson? >> i will take it back, just. >> thank you. and with that, my time has expired. the gentleman from north carolina, mr. miller, recognized for five minutes. >> thank you, mr. chairman. one of the lessons i took from the financial crisis when the folks in the financial sector that everything is under control, there's nothing to worry about, but they have a desperate look in their eyes. i worry. i think maybe they knew something they are not telling.

what really happened in september of '08 described in the press as interbank lending freezing up, in fairness to the press it's pretty hard to explain it any more deeply than that. but in that part of the shadow banking system that hardly any american is anything but couldn't hardly anyone in congress knows anything about him and those who know something about it don't know very much, was the repo markets. and as much money and was moving around every night in the repo markets, as there was in bank deposits. bear stearns was getting $70 billion in repo markets lending every night. and what they were doing with that money was making longer-term loans, and using their short-term borrowing for longer-term loans is not a formula for financial stability. and what happened is that the was an old-fashioned run, you

know, like what you saw in it's a wonderful life, it happened before there were deposit insurance in the repo markets. u.s. treasury seemed to be the principal collateral for the revolt market and for the derivatives market. if our debt is downgraded, have any of you given any thought, do any of you have any clue what effect that might have on repo markets, on derivatives market, and the use of that debt as collateral in those markets? >> yes, it is something that we've considered. i mean, it is one of the many things as we try to look at what the impact might be. and the best guess is that they would be an adjustment of the margin required. you wouldn't be able to borrow as much as through the repo market. there would be mighty -- they would be more margin in a given

amount of collateral you have. we think that's a manageable in the short term because, you know, even for example, going from a aaa to aa you still have a very high quality security, and it still considered one of the safest instruments in the world. so, but who knows what will happen long-term. >> i've gotten a letter from my state treasurer saying please, please, please don't allow federal government debt to be downgraded because most of the state that will almost certainly be downgraded as well if that happens. i understand the same is likely true of all manner of other kinds of debt, fannie and freddie, federal home loan bank debt, all and all. you have any sense of what the ripple effect will be in other forms of debt if treasuries are downgraded? >> yeah. the only sense is that will probably happen. the extent of it, just like in

2008 where we saw some of our predictions and what might happen in some of these markets we are just blown away with what actually happened. so we believe there will be an effect. the size of the effect is hard to measure. >> somebody else? >> if i could address all of that your previous question on the repo markets. the repo markets are not what they were in 2006 and 2007. there has been a substantial reduction in amount of short-term funding financing long-term assets to the repo markets over the past few years. a lot of work done at the private sector level and on and regular basis to make sure that markets are stronger. is also recognition going forward. the reality now is that the borrowers in the repo markets are much more will capitalize than they were leading into the crisis. also new regular framework coming online, the basel accord, the new capital requirements under basel and new liquidity

ohioans are under basel are designed to make the repo markets safer and sound and more stable. >> also understand great many funds required at all the difficulty aaa. do you have in the of what effect may be on funds? will they have to dump treasuries? what will that have? what effect will that have on the financial system? >> i guess i should say, my understanding is at least according to our rules, the rules don't require a aaa rating generally for marketing money market funds. where funds hold government security's or securities that are guaranteed by the full faith and credit of that, sufficient on individual funds meant investment guidelines that would require aaa rating. and i think they are in the process of looking at those guidelines in determining whether they should make

changes. >> i guess one summary question since my time has technically expired, but the chairman has not brought the gavel down yet. and i write to worry that this could be real bad, if our debt was grounded -- downgraded? >> you know, it's hard to measure but i think you're right to worry. i mean, it could happen. it could be a big thing. >> okay. my time has expired. >> thank the gentleman, and now the chairman of the full committee, mr. bachus, is recognized for five minutes. >> i thank the chairman. and the general from north carolina is right i think to be concerned about the default. i think he would also be prudent to worry about unsustainable spending, which is although a default may be a more immediate problem, the overwhelming

problem is structural long-term changes. and both of us ought to be addressed. and until both of them are, there won't be a lasting solution. i've listened to your testimony and i've acknowledged that 939a is giving you some problem, particularly the bank regulators, occ and federal reserve. you cannot mood a very quick implementing it. if you read it, it asks you to replace the reliance on credit rating agency as the sole basis with alternatives systems of credit worthiness, which could include credit rating. it could include credit rating.

but it would be an alternative which would suggest other criteria. if you noticed, you've mentioned in your coordination with our european brethren, our international coordination, european countries, the e.u., they're making great efforts to end their reliance our over reliance on credit rating. in fact, they followed i think our example. i noticed on july 11, 2011, the european commissioner member stated that the commission's credit rating legislation would address our overreliance on credit ratings. the financial times just this week said that europe intends to end its reliance on credit

ratings. and i think that means overreliance, not reliance, i would think. have you been in discussions with them as they are moving towards implementing provisions, are you aware and are you cordoning your efforts with theirs works. >> yes, absolutely. and i want to be clear, i don't think anybody disagrees that we shouldn't reduce reliance on credit ratings. that is financial stability board. it's something we agree with. with something, you know, we all think is a good thing. but to address your earlier comment, if we can read 939a to read a credit rating agency as one component in an overall credit analysis with appropriate due diligence and appropriate verification, that would make our job easier in order to

conform to the basel accord. but, you know, even the enhancements that were done in 2009 by the basel committee recognizes this and put in a lot of additional due diligence and requirements before you rely on a credit rating. >> yes, i think what, what one of the goals of how it was you heard investors, you heard, particularly in residential mortgage-backed securities, and i think that was the spectacular failure. municipal bonds, corporate debt, municipal debt, you really -- i think a credit rating agencies did a much better job. i think that's part of your hesitancy, i would think. in fact on and other asset-backed security, they had

a mixed record, but it was of more value. i think what we didn't want it was people telling us that they were required by the regulators did basically make purchase reserves or allocate their assets or the reserves based on that sole criteria. and -- but i would say this, and i didn't hear an expression. i will say this from either the occ or the federal reserve, during the entire debate, i don't recall anyone coming to us and saying this is a bad, this is a real problem. so i would say going forward, i would encourage you to have discussions with us. this is not a holy grail. we very much appreciate, and i

would just ask you to work with us on this. and i have one final suggestion. i have 30 seconds left. i know it is complicated. and it's easy to criticize. but you are the professionals, and we did intend to give you discretion, but we also intended to give you direction. and one of those directions is section 112 where we said as you cooperate, the fsoc, which you are members of, that that may be used as a coordinating body. and i don't know whether you have done that or you are aware of section 112, but i will say take a look at that. and thank yo thank you very muc. >> i thank the chairman, and now mr. carney recognize for five

minutes. >> thank you, mr. chairman. thank you for having this panel today. it's time to getting all the things are looking at here with the debt ceiling. it's also time to with respect to a hearing that we had in the financial institutions subcommittee last week about h.r. 1539, which as you may know, strikes 939 g. of dodd-frank which would have required a higher level of liability or the rating agencies and, in fact, as my colleague from ohio said was to dry up the asset-backed securities market for big employer in his district. and that was the motivation behind his bill. the sec apparently had a regulation or has a regulation that requires that ratings be part of the aspect is for such a security. and i understand that they suspended that regulation so that the market i guess would come back. the chairman, the former chairman, ranking member said

that the provision of dodd-frank would require the sec to withdraw that regulation to be consistent with the current law. is that your understanding, mr. ramsey? or could you elaborate on this situation? >> sure, i will try to briefly do so although it's a bit of a complicated issue. >> which is why i asked the question. >> we previously actually, the commission proposed at one point and put out for, the idea of removing this special exemption, if you will, for rating agencies from higher liability standard, so i think they recognize that there are arguments that could be made for or against. the commission never came to a consensus on that. the congress essentially made the decision for us. as you noted, because the abs market come because our rules require that the rating be included in the prospectus, the result will be removing of

exemption meant that rating agency would have to consent to have the rating information included in the prospectus. they refused to consent. as a result of was the potential that the registered abs market would be shut down or they wouldn't be any deals being done. we thought that was a bad result for the markets, and for investors. and so we issued a no action letter to allow that business to continue. and that no action letter was recently extended. that's where we are spent the last part, the sec wouldn't be required to make its rules and regulations consistent with dodd-frank, and thereby i guess went through all of that requirement. >> well, we haven't done anything to alter what was done in the statute. the only thing we did was to

issue a no action letter with respect to the abs market. >> do you have a view our other panelists half of you on whether the rating agency should be subject to that expert standard? people to listen to the rating agencies. we are seeing that right now. when i was in state government we listen, in fact when the rating agencies said john, we said how high. and we would go, i was secretary of finance, we would go to the regular and so you can do that because if you did that it could affect our rating. now have the debate of the day sitting of course the big are you is we don't want to default, we don't want to downgrade it. so people do listen. some of these discussions and arguments is do they rely on the ratings too much. but what about the standard to the lively stand has a way of disciplining what might be put in a rating and included in a prospectus.

>> we don't have a view on it. i think both of those statements are correct. >> does anybody else have a few? if you don't or you don't want to offer one, that's fine. to let me ask this question. what does a different world look like? i frankly think ratings and the opinions that go with them are very meaningful and have always been in the world that i live in. so what does a different world look like what we don't rely so heavily on the ratings, going back to the chair, he is not here, mr. bachus is question? does anybody have a view of what that world looks like? >> back to mr. bachus' comment about, the comments about real problems were were with the securitization structures, and a view of the world is, you know, there will be some reliance on credit ratings, but there should be additional due diligence. there should be an understanding

on the part of the banks we regulate and other investors on what is actually underlined that securitization. that's not a new view for the occ. we have guidance in that area. we reaffirmed and strengthened it in 2009. arguably we didn't enforce it as much as we should have, but i think that's the view is again, back to this idea of reducing reliance on credit ratings. >> thank you. i see my time has expired. i thank the chair for the additional time. >> and now the vice chairman, mr. fitzpatrick for five minut minutes. >> thank you, mr. chairman. mr. ramsey i want to follow up on the chairman's life questions earlier. having to deal with the designation process at the sec for recognizing the national recognize statistical organizations. i think you testified that for

years the commission had a policy of issuing and no action letter. can you expand on that, with the process was and what it currently is? >> sure. so i think beginning 1975, if i'm not mistaken, the commissi commission, when the first use of the term nrsro was and put in commissions rules, essentially the commission granted what we call no action relief which is essentially a letter issued by the staff assess it would not recommend enforcement action if the private market participants operated in such a particular way. these were letters, were essentially ways of recognizing the individual rating agencies, and those ratings would then be recognized in particular rules. that process was criticized as being not very transparent. i think probably rightfully so. and so as a result, in 200 2006t

congress created a structure that created a much more transparent process for applicants to come in and register. sense of that authority granted we have registered 10 different entities. we have only turned down one. the only one we turned down was unable under the loss of its local jurisdiction to be able to say that it could provide as with documents and examination authority that we would need. so we have been trying to use the registration process and the authority that we have been given to encourage competition, but recognizing that we have to be able to make some baseline findings that are required either statute that the agency's use. >> is it your sense the participants are increasing the quality of the information, increasing the quality of what is out there for investors but

also may be decreasing the cost of? >> well, i would be hesitant about talking about quality because as i mentioned, we are prohibited from regulating the substance of ratings. i think we do believe that the rating process that exists now is more, substantially more transparent. that the rating agencies are more accountable now. we think the proposed rules that we have put out there will make them much more the case. and hopefully more competition will exist as well. so, we recognize that the rules that we propose will impose some compliance costs, and we've asked -- those rules are still out for comment. we've asked, if there are ways rules can be crafted so they don't impose so much in the way of cause. we think more competition is a healthy development. >> how about the opportunity for smaller rating agencies to participate in the market? are you guys taking a look at definition of what a small

agency would be? >> we are, and, you know, i think that the rules are relatively new. the authority is relatively new, so, you know, we have had some people come to us and we have been in discussions with them. there's not much of a president or a track record there is which are figuring out, we're sort of going through that process for the first time. >> sir, there was an executive order in the memoranda from president obama unequivocally called for regulations to be applied in the least burdensome manner in order to reduce unnecessary regulatory obstacles to competitiveness in the industry. so given that the three large nrsros control over 80% of the credit rating market, and have significantly large profit margins that allowed them to absorb the higher compliance costs, you believe your proposed rules address the disproportionate impact of

compliance on smaller rating agencies? >> well, congressman, as i mentioned the rules are still out for comment, and we have, we've asked for comment. we really do want to hear from people as to whether the costs are excessive, if there are ways we could scale them back. i should be clear that the statute is very prescriptive in terms of the kinds of rules we are required to adopt. we've tried in our proposed rules as much as possible to adopt what i call it policies and procedures approach which is that we require agencies to adopt policies and procedures to achieve these, a specific objective rather than try to dictate the weight which they have to achieve a. so we have -- and there are aspects of a rose by creating more information that allow investors to compare performance, so we hope over the long haul will spur competition.

>> thank you. >> i thank the gentleman. now the ranking member, mr. copy on the. >> thank you, mr. chairman. thank the children i want to jump into it a couple things. the 939a stuff though i think is good, is or anything any rule that prohibits the market from looking at a credit rating from anybody? >> no. >> you can't make them do it but you can't stop them from doing it either. is that a fair statement? >> it has to be removed from the regulations. it doesn't mean the investor -- >> that's what i'm suggesting. the market will call for a credit rating no matter what we do but i think it's a good thing to get them out of got to get a good thing to do but i don't want to pretend that's going to be the end of all our troubles. the market was to be looking for credit rating. do you think that's a fair statement? does anyone think it is an unfair statement? >> seems fair. >> thank you. i guess on the 939 g., section

11, again, it's not in the prospectus but am i wrong to think that most credit ratings are available to the general public whether it's in the prospectus or not? >> i think generally the information does get into the market one way or the other. we prefer to have -- well, i should say this is a matter that is under review. we have . ..

a failure to consent means -- >> rating the still available to the public. sabah them simply not putting in a prospectus doesn't mean they are hiding it or putting in the bottom drawers so no one can see it. just not in a technical document that is technically available available everyplace else other than the document. >> that is correct. >> nothing in this regulation or any other regulation that can supersede a lot of congress. is that a correct statement? >> i would say that is correct. >> congress has said to get rid of this the sec has nothing yet. i would argue it doesn't matter what regulations say. what matters is what congress says. congress has said it is no longer relevant so do whatever

you want. it is illegal regulation the sec has hung on to for no particularly good reason. number 2 relative to section 11 it doesn't relate to the other liability put in place by dodd-frank that says the credit rating agency can be held liable knowingly or recklessly conducting business. is that a fair statement? >> i am sorry. >> none of you are lawyers. >> i am a lawyer. [laughter] >> i am too. two good guys and once those so. don't worry. as far as i see it one liability in section 11 is the technical aspects. knowingly and recklessly is there for anybody to use and nothing anybody does to stop that. i know that has been used but

let's not pretend section 11 is the only thing protecting people from credit rating. >> i agree. liability is bare and needs to affect the dodd-frank act sort of made the pleadings stated these year with respect to rating agencies. >> i am not -- [talking over each other] >> i hope it never gets used because all want is for the credit rating agents to do their jobs. as you have been going through this, and opinion question. you may or may not be comfortable answering it. do you have an opinion whether credit rating agencies in general are doing their job more efficiently or effectively than they were prior to the crisis? a straight up question that puts you on the spot. i am not trying to but that is my job. go ahead, mr. wilson. >> there has been lots of energy

devoted to the problems we all saw including the rating agencies. in addition there will be a lot of additional requirements. >> you think they're doing a better job than they were before? mr van der weide? >> they're doing a better job. many of us reacted to the lessons learned by improving the way we estimate risks. they are doing better. the crucial thing is no matter how good we think they're doing we not overrely on them. that is the chief goal. >> it is fair to say because the regulations that are in place are more consistent in terms of methodologies and the amount of disclosure investors can use is much greater. >> one final question. your agency was tasked with creating an office of credit

rating. would you have been able to do this if you were able to reprogram your money? >> my understanding is the reprogramming authority required from the house has not been granted. as a result what we have done is take resources from other examinations to complete the annual examinations that were required this year. we have had to draw from the joint investment adviser and other exams. that has imposed some strain on our resources. >> thank the gentleman. now the gentleman from texas, mr canseco for five minute. >> mr. wilson, your testimony describes difficulty with a workable replacement for credit ratings. section 112 of dodd-frank empowers financial stability oversight council with the

authority to coordinate rulemaking and recommend regulatory principles. have you requested assistance from the chair person of the financial stability oversight council to use its authority to provide assistance in 939 a will making? >> to my knowledge we have not. >> mr van der weide? >> we have not. we concluded the coordination needed in this process between the banking agencies because we have a lot of common regulations so it is critical the banking agency coordinate. we are coordinating meetings with working groups to develop alternatives. we also consulted with the sec and other agencies. we can't call that the coordination process. there is a lot of coordination and consulting going on but we have not asked fsoc to get

involved. >> i am not aware that fsoc has been involved in this issue. the agencies themselves have been talking to each other. >> the fcc has made significant progress removing references to ratings and even began process when this seemed a likely legislative possibility in 2009. wine with the sec able to move forward while you are here talking about the challenges? will you fulfill your statutory duties? >> we will have to. i will say we talked before in our testimony, a couple challenges related to the capital rules that are different from a lot of other rules and that would include occ specific rules that are more similar to many of the fcc rules where it

is an on/off switch for a two but that approach where it is either investment grade or not. that is easier to address in a definitional way. when you have capital rules and securitization rules that have 12 buckets it is hard to distinguish risks between those buckets without something grander like a credit rating. that is part of the difficulty we have to find a solution to. >> in your opinion how does making it easier to sue moody's and s&p to better assess their risks and reduce their reliance on ratings? >> i guess i wouldn't want to proffers an opinion on what you specifically suggested. the potential liability is

something that exists for all actors in the markets. section 11 on liability is one step up from 10 be liability and policy arguments as to whether rating agencies should be treated like accountants for those purposes. the commission hadn't reached the amount but liability is available for a variety of factors and that is for the courts to sort out, not the sec. >> do you think this cloud of liability improves the accuracy of the credit agency? the credit rating agencies? >> i am not sure what the connection might be. i am not sure of any research on that. i wouldn't want to offer an opinion on what the connection might be. >> would you agree that the

prospect of liability or exposure is a lag over the accuracy of credit rating agency? >> i don't think i am in a position or qualified to offer an opinion on the relationship between the level of liability and the ultimate quality of the ratings. >> mr. wilson, one last question. do you believe it is good public policy for the government to mandate the use of credit ratings by privately-owned companies and use those ratings as the basis for capital requirements? >> it is like one of those where it is the best option we have and that is what the basel committee came to so it is a hard answer but until we can

find a better option that is what they decided. >> to you have an opinion? other than the basel requirements? >> is difficult because i don't have another option that is better. if you want to be brisk sensitive. >> thank you very much. yield back. >> the gentleman from new mexico, mr. pierce for five minutes. >> thank you. mr. wilson, is it right to worry about a potential downgrade, your comment was something like it could happen. is that right? the worry is it could happen. >> we have done a lot of work on this and talked with a lot of folks. as you know it is very difficult to assess the impact. >> problem is that it could happen and if it doesn't happen

it is okay. >> yes. >> i will pursue that and drill down a little bit. mr van der weide, you described things that caused ratings to be bad, flawed assumptions, ltd. verify data on asset tools to follow frequency and potential conflicts and on page 3 these flaws contributed to credit ratings that underestimate the credit risk, underestimate the risk. my question is is it possible to underestimate the risk with regard to the federal government? >> there is a fair amount of uncertainty. >> even if we don't default on august 2nd are their uncertainties still lying out there? >> there certainly are uncertainties and part of our

job as bank regulators -- >> who is in charge of making sure those rating agencies adequately correct the problems on the previous page? who is responsible to make sure that doesn't happen again? >> complicated question. [talking over each other] >> nobody is responsible. any time i get the word it is complicated and washington that means nobody is responsible. >> different agencies are responsible. >> if all of us are responsible none of us are responsible. i have six brothers and six sisters. it was not a small deal. >> agencies responsible for doing their part to remove references from regulation. >> i was going for a fascinating process looking at a failed bank. it with a solid looking bank. they went in and realized they had not adequately judge --

looked at things so all of a sudden it skyrocketed in risk because the rating agency suddenly became aware of that. then these very precise comments that are accurate about the repo accounts in bear stearns and doing things that were risky and you said we cured that risk. so my question, would it worry you that the asset pool of the u.s. government repaying our debt is being printed by the guy sitting next to you called quantitative easing and ben bernanke came in the day before or a few days before and said he is ready to do it again. quantitative easing 3. you mentioned on page 2 of your testimony about alternative credit worthiness standards. i know they haven't been downgraded and they may not be

downgraded on august 2nd. you saw the falseness of bear stearns doing what they were doing. the oversight agencies have seen the falseness of what was going on in banks. is anyone daring to speak? are you internally developing alternative credit worthiness standards for the u.s. government? >> we are not. we are all participating in a little process here. we are going to print money and make sure we can pay the bills and pass that legislation so that we don't default because that is a huge deal and we can't stand that. in truth the credit worthiness of the u.s. government has never been adequately looked at and is not being adequately looked at now. we passed aug. second, i think we still have a system that is

badly out of kilter and we are printing money to make it work and we are going to act like we can just continue to whistle while we work and somewhere somebody ought to get some truth in this system. i yield back mr. chairman. >> i thank the gentleman. recognize miss yberth. >> thank you for being here. that eu commissioner in charge of financial reform last week, i will quote something he said. c r a rating there too embedded in our legislation and i intend to reduce the references made to those ratings in potential rules. that is my first priority. i can tell you the first of these measures to limit overreliance will be integrated into the upcoming modification

of capital requirements directive which is the effective translation of basel iii. i will make these proposals to limit overreliance strengthening requirement for banks to carry out their own analysis and not rely on external ratings in an automatic and mechanical way. as i understand it our current statutory requirements on our side as well to limit the weight of c r a ratings in capital requirements. given that you rely on statutory authority from congress and you work with our european counterparts to create the compliance with basel iii what is your plan to advance?

do you have a plan to advance the goal of not automating and mechanically having c r a ratings be part of how you evaluate capital? >> we do. it is important to note there is an evolving global consensus on this particular issue. all the major is jurisdictions are moving towards removing reliance on government and private sector alliance on credit ratings and moving them from capital requirements. we are in extended discussions with international counterparts and the basel committee about the right way to do that to focus attention in the short term where the rating agencies' accrued up the worst in structured finance areas they were having active discussions but what the right way is to reduce the capital rules reliance, international capital rules reliance we are making good progress on that and we are

also spending a lot of time working for different alternatives removing ratings from the u.s. implementation and global capital. >> i would echo almost everything mark said. we all agree the mechanical reliance on credit ratings was not the right way to go. there is global consensus on that. we are all looking for good ideas to reduce reliance. the question is reducing reliance or absolutely banning reliance on it. >> thank you both. it sounds as though, speaking as a consumer of information and investor in my own life, it is challenging. i trust you are working on what

we can offer to assure consumers of financial products that there is a way in which we can reliably use parameters to judge the quality of keppel in our institutions. one appeal is having credit rating agencies. if it works right you have a standard. the problem seems to have been that that standard was not one on which we could rely as scientifically -- is that an accurate impression? >> pretty accurate. one thing we got in the interagency working group looking at this issue is to find replacement credit rating that is transparent and consistent across different banks and financial instruments. that is useful to the markets and banking system and regulatory committee. transparency is a hallmark we

are striving for. >> thank you. i yield back my time. >> thank you. mr. stafford is recognized for five minutes. >> the gentleman from delaware said a represent columbus ohio and surrounding areas in my district. we make half a million cars a year and employ 3300 people at uses asset backed bonds to finance building and financing of cars. i have some questions for mr. ramsay. the gentleman from massachusetts embedded in a question assumed ratings are not in perspective of asset backed bonds but they're still in the prospect of the fcc still requiring that. aren't they, mr ramsay? >> our rules currently as grandstand it requires ratings and prospectorss but that is a topic we also have for public

discussion. >> the status of that, is there a pending proposed rule out there? >> these are yes or no questions. >> yes. >> it is a proposed rule or in draft form? >> there's a proposed rule. >> it would remove the ratings? i have not seen the proposed rule. i heard there's a discussion draft but have not seen a proposed rule. >> the commission put out a proposed rule at least for shelf registration aps requirement. >> next question goes to how these things happen. is the credit rating agency involved in preparing a prospectus, reviewing a prospect is or is the credit rating agency just inserted by attorneys and accountants in the prospectus? >> you're getting out of my depth in terms of the way those

things are prepared. i am not aware they are involved in preparation of the prospect this. >> that just goes to the point prospectus is not their document. let's talk for a second about what you know about section 932, 933 of dodd-frank. the gentleman from delaware alluded to this. is there not liability for the credit rating agencies under those sections even if 939 gee were to go away? >> in general terms there are two potential roots for liability. one is section 11 which is the higher standard of liability that exists for certain experts and also general anti-fraud liability under section 10 be. >> before dodd-frank credit rating agencies were sued before

the cause of liability was -- >> they have been. [talking over each other] >> i am not aware what the court precedent is. i am not aware there is anyone pattern of decisions on this. >> it has not been universally and accepted. we did not need the new liability in section 932-933. no one is proposing that to go away but 939 provision is of concern to a lot of us because it has frozen up the asset backed market. the market is depending on a definite no action letter from the fcc. i am excited to hear that you proposed a new rule. i will have to check that out. i heard there was a discussion draft but i haven't seen it. i will look for it today. >> the gentleman yield? >> sure. >> i would like clarification from mr. ramsay.

you said that your requirement the rating be in the perspective is still enforced. is that what you said? >> my understanding is for asset backed deals there's still a requirement for trading information be included. there they no action letter. >> you just mentioned and that a minute ago. frankly means that the ratings as scientist and it are not being included but they're being included in selling documents. is that your understanding? >> that is my understanding. that is not my understanding. i believe they are being included and frankly the no action letter applies to the 939 g provisions of holding people liable as experts. is that not correct?

>> perhaps a should have my friends in the corporation of finance get back to you. i am pretty sure that is right. >> thank you. >> i think -- i yield back. >> that is all the questions from both sides. we want to thank this panel and with that we will dismiss this panel and call up the second panel. i would like to welcome the second panel here. we have deven sharma, president of standard and poor's. michael a rowan of commercial

growth of moody's investors. mr. james gellert of credit ratings, mr jules kroll chairman and ceo of kroll bond rating agency. mr. larry cabbage, stearns school of businessed and mr. smith, chief operating council of public employees retirement association. i would remind you your written statements are made part of the record and you will be recognized five minutes. mr sharma. >> thank you, members of the subcommittee. good morning. my name is deven sharma and i am president of standard and poor's and served in that capacity since 2007. i am pleased to appear before you today. much has changed with regard to credit rating agencies over the past several years.

both in terms of how we go about the work and the regulatory framework in which we operate. for our part we at standard and poor's have undertaken a variety of initiatives in recent years designed to further our fundamental mission of providing high-quality independent benchmarks about credit worthiness of debt security. these initiatives include measures to strengthen governance and control framework and have the analytics and criteria for you to raise issues and issuers and clearly communicate the rationale behind the actions and better identify key areas of risk to further transparency in the market. these initiatives reflect significant efforts we have made to enhance the way we go about serving investors, regulators and capital markets. put simply added checks and

balances, our organization operates very differently than it did just a few years ago. these changes include investing significantly in compliance of quality operations including significant staff additions. establishing independent criteria process, supplementing existing controls against conflict of interest including implementing reviews and analyst rotation program. adopting enhanced ratings definition and updating criteria across major asset classes to market those definitions. this has enhanced, operability across asset classes and also led us to look for a stronger credit characteristics for security seeking higher ratings. enhancing this support of

applicable factors and variables and assumptions underlying their analysis and finally increasing analytical training of our analysts including a new certification program. a more comprehensive list of these initiatives can be found in my written submission on our web site www. standard and poor's.com. regulatory landscape has undergone major change. through legislation and related rulemaking regulatory measures have reinforced the ratings process through increased oversight, greater transparency and accountability and improved analyst training. the passage of the credit rating agency reform act together with a vigorous set of governing rules adopted by the sec establish the first comprehensive regulatory scheme.

now required to make extensive disclosures for determining ratings, performance measures and credit ratings for dressing and managing potential conflicts of interest. the c r a act empowers the sec to conduct detailed examinations of rating agencies, practices and procedures and lowered barriers to entry for other credit rating agencies to register with sec. indeed several new rating agencies registered in recent years including those that employ investor papers and rating agencies that use different analytical approaches in their ratings. the s&p agrees approaches to benefits to markets with more information. dodd-frank represented another significant event in the evolve in landscape for rating

agencies. one notable aspect of dodd-frank is the requirement federal agency's review their use of credit ratings in rules and regulations and remove references to ratings from several areas of federal law. the s&p has long supported addressing undue reliance on ratings by the market. elimination of legal mandates and the use of ratings. standard and poor's welcomes many of the regulatory changes that have been put in place in recent years. we firmly believe the most important value rating is independent and forward-looking view of future trade worthiness. for the markets to have confidence in those ratings they must ultimately represent the rating agencies meaning that they should be free of commercial consideration and the s&p is committed to that principle. it also means there must be free of regulatory government influence as to the analytical substance.

we believe it is critical that new regulations reserve the ability to make their own decisions without fear that those decisions would be second guest if the future does not turn out as anticipated or potential controversial view that will expose themselves to regulatory retaliation. pressures of that sort would undermine a significant progress we believe has been made over the years by rating agencies and regulators alike to provide the markets with transparent quality and generally independent views about the trade worthiness -- i thank you for the opportunity to participate in the hearing and i will be happy to answer any questions you may have. >> mr. rowan. >> good morning mr. chairman and members of the subcommittee. i am michael rowan, managing director of commercial group at moody's investors services. on behalf of my colleagues i

thank you for the opportunity to participate in today's hearing and speak to you about moody's and the role credit rating agencies can play in the markets, competitive landscape and the impact of dodd-frank. in providing our perspective on these questions i would like to outline two principles that have guided us over the years. first moody's believes the legislative initiatives that periodically review and update the regulatory regime under which market participants operate are necessary and healthy. they can increase market confidence that rules are fair and the playing field is level. they encourage best practices among and across industry. we think when the regulatory landscape allows for and encourages numerous differing views while permitting market participants to choose the opinion providers based on quality. it is equally important that contrary opinions not only be

tolerated but encouraged. for these reasons moody's has been a strong advocate of competition in the industry. so long as that competition occurs on the basis of quality. moody's has developed a reputation over long time. we are well aware of the loss of confidence in the credit rating industry. largely driven by performance of the u.s. residential mortgage-backed securities sector and related collateral debt obligations. over the past several years moody's has adopted and will continue to adopt a number of measures to regain confidence in that sector. actions and initiatives we have pursued can be categorized into five broad areas. strengthening the analyst integrity of credit ratings, enhancing consistency across ratings group's, improving transparency of credit ratings and the ratings process, increase in resources in key areas and bolstering measures to

mitigate conflicts of interest. one in issue of a wish to underscore is creation of a department are head. our mandate builds on prior measures through which moody's first prohibited rating analysts from discussing fees with issuers. and extended that to their managers. last year we took those efforts one step further and created -- to strengthen separation between credit rating and credit policy functions on one hand and our commercial functions on the other. my position was established in the commercial function under, leadership. the commercial group is responsible for business strategy and planning. new business or origination and managing relationships to the rating agency. the employees of the commercial group have no involvement in determining or monitoring credit rating or developing or approving rating methodology. equally important moody's analytic employees are not involved in commercial activities of the company which adds another layer of protection

against potential conflict. for our own internal efforts moody's supports regulatory reform and believes effective regulation of credit rating agencies is positive for our industry and the broader market. credit rating agency reform act of 2006 and title ix of the dodd-frank act, on national recognized organizations to be transparent about their opinions and methodologies and address conflicts of interest. dodd-frank introduced measures of accountability and reduced regulatory credit ratings. in particular moody's has supported removing reference to credit ratings and regulation. we believe mechanical figures regardless whether they are ratings based on market signals or another type of measure can inadvertently harm by amplifying rather than dampening the risks. over the past year the securities and exchange commission has been proposing rules and seeking comment for

studies related to the credit rating agency as mandated by the dodd-frank rule. moody's has submitted comments on these proposed rules and studies and will provide our views throughout the sec public process. we anticipate the new rules will spur changes in moody's process and operations as well as lead to the deepening of moody's existing practices. we anticipate the regulatory landscape will lead to further change our objective remains what it has been for the past 100 years, provide the highest quality, research and analysis. thank you for inviting me to testify and i look forward to answering your questions. >> mr. gellert. >> on behalf of rep rating employees and shareholders i thank the chairman and ranking member capuano for asking me to join you.

i am james gellert, chief executive of rapid ratings. as we arrive at the 1-year anniversary of dodd-frank we face the same or worse landscape as a year ago. s&p and moody's have influenced competitors that have even more challenges and costs and rating agencies are less likely to apply. rapid ratings is not a traditional rating agency. we are a subscriber paid firm. we utilize proprietary software based system to raise financial health of thousands of private and public companies and financial institutions from 17 countries. we reiterate all filers quarterly. will use only financial statements, no analysts and no contact with issuers, bankers or their advisers. in recent third-party academic paper we are identified as being 2.9 years earlier than moody's downgrading below investment grade companies that ultimately failed.

representative asian and competition. dodd-frank has positive and negative initiatives that penalizes the wrong players, creates disincentives for new players and missed opportunities to change the rating industry. the biggest positive initiative is removal of nrsro references. many covered that and will so i will skip that and refer you to my written testimony on that subject. the negative developments can be grouped as increased reporting, oversight, administrative and compliance duties. i do not disagree with prudent governments and compliance but am discouraged by the cost associated with complying. many of these rules were implemented to address conflict of interest and behavioral issues of the big three and those companies are the only ones who can afford to comply. increased liability dominated the reform debate through 2009 in to the enacting of dodd-frank

as the most politically charged concept for reform by the public at large. it may set stricter liability standards on agencies that contributed to the crisis but dodd-frank changed the relevant language from nrsro to credit rating agency at the last minute. this was the only material instance where non nrsros were captured by this statute. i wonder why. i suspect to prevent nrsro from not registering. this is a statement, directors felt dodd-frank would go over. i suggest cras should be given safe harbor from these provisions. section 932 of dodd-frank covers disclosure of ratings methodology and attempt to mayor -- measure ratings accurately. implementation regulations propose so much disclosure of underlying methodology that they put at risk the intellectual property of a firm like rapid rating that is innovation driven.

this is overkill. on accuracy more accurate ratings are good for the market but regulatory enforcement of the prescription of accurate ratings is not. markets drive innovation, not regulation. if the standard for rating the accuracy is prescribed by regulation agencies will engineer ratings to the standard by which they are measured. this means fewer diversified opinions. homogenizing ratings only corelate risk-taking and increase systemic risk. major shortcoming is dodd-frank does nothing to expand nrsro access to data in the ratings process. terms can access data on some forms of structured product but not enough. collateral loan obligations of a perfect example as detailed in my testimony. next week i will propose in a letter to the sec a simple yet wide reaching initiative to assist in the improvement of the industry. all nrsros should file an affirmative statement to the sec then they confirm or change each

previously issued outstanding rating on a quarterly basis. this initiative would force firms to think more carefully about their initial ratings and ashore they stand by their product, promote confidence in the ratings process among users, make asset managers more responsible for understanding frequent rating -- inshore the sec has more performance data. effective reform will come with not stifling competition through compliance costs, removing reference from regulations that increased dependence on nrsros and avoiding homogenization of ratings, increasing flow of data into the market. why take the young hungry competitor and subjected to all manner of change, increased scrutiny, liability and a playing field that changes? until benefits outweigh the costs we will build our business

outside the nrsro network. thank you. >> mr. kroll. it your button. >> thank you for the opportunity to speak with you this morning. my statement is a very personal statement. i built my previous company starting 40 years ago focused on the concept of due diligence and focusing on the concept of fighting corruption in the corporate world and in the government world. it was all about bringing professionalism to an industry which was not held in very high repute in those days called the private detective industry. unlike james i can take on the attributes of a young hungry competitor. consider me an old hungry

competitor. a couple things i would like to say. i sold my company. i was in pretty good shape. my wife was complaining i was hanging around a house too much and i began to look at things where i might apply my experience and the experience of my colleagues to important policy issue as we have with corruption and kickbacks in the 70s, 80s and 90s. i marvel at the rack of these rating agencies had. it was beautiful. charge what you want and take no responsibility, hide behind the first amendment, make a lot of money look like a good business model. i began to study it to see if our skills and history and knowledge could be applied here. this is a personal statement for me. my view is the whole concept that you hide behind the first amendment and accept no accountability for your work is

irresponsible and scandalous. i have yet to hear people say at the big three that they are sorry. they said they underestimated the depth of the housing crisis in america. who do you think contributed to it? i don't want to wine about that. i want to tell you what i am doing about it. some of the obstacles we face. i don't know about the rest of the. when i read a novel like sheet. i go to the end. i want to see is that hero or heroine still alive. i won't told you in suspense for my remaining two minutes. here are my asks. we became nrsro because when it came to public pension funds and corporate pension funds and university endowments there was no official status to your rulings unless you were nrsro. as long as there's nrsro we had

to become one so we bought the tiniest one there was. a little company doing $1 million a year. we developed a marvelous business model. we managed to spend more money on lawyers and compliance in the last year than that company had revenue. my wife informed me this is not a good business strategy but it is essential because we need a better foundation. here are my asks. let's go back to the fitzgerald bill and its attempt on competition. there were some firms that came in. one of them we bought. another one is still in business. en real point was acquired by morningstar. those are the three smaller ones. there's nothing james has said that i don't completely endorse whether nrsro or not nrsro. he has got it right.

we have to look at the pages in response to dodd-frank no less on my birthday, may 18th. they made an effort to comply. they have tried to be in sync with the legislation from dodd-frank. when you're making rules for massive numbers of people working in every discipline and opining on which country should be downgraded or not that is a different species. the mice can run and compete with the elephants if we have the burden and the expense laid on because of this. i have some sympathy but not much given the amount they make. these are among the most profitable companies in america.

time to reinvest in what they do. our business is totally focused on where the problem was. we are totally focused on the structured finance ari and we are building it silo by silo and making headway. latin up on the burdens from the regulatory point of view and let it get on the field and compete face-to-face on the accuracy and quality of ratings and let's not hide behind the first amendment. let's be accountable for our work. >> mr. white? >> chairman neugebauer, mr. capuano, i am a professor of economics at the stearns school of business. represents only myself at this hearing. thank you for the opportunity to testify on this important topic. the three large u.s.-based credit rating agencies, moody's, standard and poor's and fitch

have their optimistic ratings from mortgage-backed securities in the middle years of the past decade. played a seminal role in the financial debacle of the past two years. given this context and history it is understandable there would be strong political sentiment as expressed in section 932 of the dodd-frank act for more extensive regulation of the credit rating agencies in hopes of forestalling future such debacle's. advocates of such regulation figuratively or literally want to grab the rating agencies by the lapels, shake them and shall do a better job. this urge for greater regulation is understandable and well-intentioned but is misguided and quite harmful. the regulation of the rating agencies will discourage and tree, set structures and

procedures and discourage innovation in new ways of gathering and assessing information, new technology and methodology and new models possibly including new business models and may not achieve the goal of inducing better ratings from the agency's. they are likely to make them more central to support the bond market. why would we want to do that. we just heard about all the problems in section 932 to create especially for the smaller agencies. that is also embodied in dodd-frank in section 939 and 939 a. these are the sections that remove statutory ratings

references to ratings and instruct federal agencies to review and modify the regulations so as to, quote, remove any reference to or requirement of reliance on credit ratings and substitute in such regulations such standard of creditworthiness as appropriate. .. >> it's a check the box kind of

approach. is easy for the regulators. it's easy for the regulated. but at another level, this is not rocket science we are talking about. the approach of the regulators ought to follow the same approach that bank regulators already use. they currently use for assessing the safety and soundness of the other kinds of loans that are in bank portfolios. that approach basically says, place the burden directly on the bank or other financial institution, to demonstrate and justify the safety and soundness of their bond portfolios. that's a censure. that safety and the regulatory approach, that must remain. the financial institution can do this either by doing their own research and analysis themselves in house, or they can rely on third party sources of credit

worthiness information. third party sources might encompass the existing incumbent nrsros or other sources of credit worthiness information. and there are other sources. there are those smaller non-nrsros. mr. gellert represents one of them. there are credit worthiness fixed income analysts at securities firms, and in a more open environment. they might be encouraged to hang out their shingles and start doing more independent analysis on their own. regulators have to check on the competence of the financial institutions. in doing that research, or in hiring, and employing the services of those credit worthiness advisors. but it can be done.

so section 939 and 939a are the direction to go. when they are fully implemented, then there wouldn't be any need for the nrsro system. if we can somehow avoid the dangers of section 932, ideally if it were my choice, i would repeal 932 in a heartbeat. then the bond information market, and that's really what we're talking about, information would be opened to innovation and entry in ways that have not been possible since the 1930s. my written statement expands on these ideas. thank you again for the opportunity to testify this morning. i would be happy to answer questions from the committee. >> thank you mr. white. >> thank you, chairman, ranking member capuano and members of the subcommittee --

>> would you see if your -- >> sorry. i apologize. mr. chairman, ranking member capuano and members of the subcommittee, thank you for having me. good afternoon. i'm greg smith, general counsel and coo of public employees' retirement association. am also a number of the board of directors of the council of institutional investors. i appreciate the opportunity speak to today. my testament will emphasize three points. first, the systemic risk been created by the premature removal of credit ratings from all regulations, versus the fact of investor the sec's role of credit rating agencies and what it takes to accomplish that goal. and probably the critical nature of the provisions making credit rating agencies accountable as are others for their product that they sell. colorado is a pensioner with more than $40 billion in assets and as general counsel and coo am responsible for protecting retirement security of more than

475,000 participants and beneficiaries in that system. in that capacity and as a board member of the council, i've had the opportunity to study the issues surrounding credit ratings industry and the ways in which ratings agencies actions impact institutional investors and pension funds. at the outset it's important to note neither prior to the financial crisis nor subsequent to the passage of dodd-frank has colorado pera ever relied on ratings as the sole source of my cell decisions. ratings are used as a part of a mosaic information we considered during the investment process. that's the way all responsible institution investors have done and continue to do it. out investment process involves risk budgeting, never to ensure that investment managers are generating appropriate returns within a specified range of risk, a consistent and reliable risk measure is critical to institutional investors in order to manage those risks budgets.

in addition ratings are important factor in our decision to participate short-term credit facilities such as cash account and money market funds. we fully agree with the conclusions of the financial crisis inquiry commission, and many others that quote, the failures of credit rating agencies were an essential card in the wheel of financial destruction, closed quote. in light of those players in the credit rating agency provisions of dodd-frank that follow, colorado pera have begun a process of consulting with internal fund managers and outside experts in order to identify appropriate alternative measures of risk. we're hopeful once identified such measures can also help to define in our investment management agreements the level of risk to be taken on by our individual portfolio managers. the process as we have heard from the occ as well as the fed today is a challenging one. and to date identifying cost efficient measures that could

comprise of robust objective evaluation of credit risk remains elusive. in the meantime and to the extent credit rating agencies continue to act as gatekeepers for the financial markets, we strongly believe the rating agency should have an appropriate level of government oversight and accountability to investors at least as rigorous as auditors, investment banks and other financial gatekeepers. providing inappropriate level of government oversight for credit rating agencies require sufficient funding of the sec so they can implement and enforce the provisions of dodd-frank that begin to address credit rating agency conflicts of interest, lack of transparency, and other deficiencies. as you are aware, sec funding does not increase the federal deficit because its budget is fully offset by fees imposed a financial entities engaged in transactions. depriving the sec of necessary funding as a suppose of punishment