Bring competition to credit rating business

Official Washington was seized again yesterday by its preoccupation with the debt ceiling. But in a nearby hearing room, little noticed, the nation's opportunity to reform a key villain of the world financial meltdown was stealing away.

Credit ratings agencies, which stamped "AAA" on mortgage-backed securities that we now know were riddled with risk, are having their rules of operation discussed and rewritten through a comment period that closes on Aug. 8.

The condensed nature of this industry -- coiled into a small oligopoly of three: Standard & Poor's, Moody's and Fitch -- created the systemic risk that nearly cratered the world economy three years ago. Greater competition among credit raters would broaden the tools investors use to make decisions, and would add security to the financial markets. But it's not clear that's where we're headed.

The financial services reform legislation, Dodd-Frank, celebrated its first anniversary this month. One thing it requires is that the Federal Reserve and the Securities and Exchange Commission remove references to credit ratings agencies from their regulations and replace them with better standards for judging credit risk.

Those efforts were on display yesterday, at a hearing of the oversight subcommittee of the House Financial Services Committee. Executives from Standard & Poor's and Moody's testified. They appear prepared to accept a new operating regime, but that may be because the rules regulators are considering "create a protective barrier around the incumbent ratings agencies and . . . make them even more central to and important for the bond markets of the future."

That was a concern raised by Lawrence J. White, an economics professor from the Stern School of Business at New York University. He recommended to the subcommittee that regulators move away from allowing banks and other institutions to outsource safety judgments to credit ratings agencies. Instead, institutions should be made to justify to regulators that their investments are safe and appropriate.

White is right to shift the burden of accountability -- but I don't care to see it rest so heavily with regulators alone. Think how many times Bernie Madoff was reported to the SEC, without effect.

Fostering competition is a good and necessary tandem approach. It's how we will evolve from the systemic risks of the last decade, to individuals placing investment bets using diverse information and resources. Individuals may guess badly, but their mistakes don't metastasize to an entire industry.

James H. Gellert, chief executive of Manhattan-based Rapid Ratings International, which seeks to knock the crown off the Big Three, compared this technological moment in the credit ratings industry to the change from typewriters to computers or from whale oil to petroleum.

Gellert and the chairman of an emerging ratings firm that bears his name, Jules B. Kroll, testified that Dodd-Frank doesn't do much to promote competition, and depending on how the SEC implements the rules, could actually quash the ability of smaller competitors to offer an alternative.

Kroll stated that the cost of compliance with the new rules is "a disincentive to entering the industry."

While the debt ceiling debate continues to crowd aside other topics, it's worth noting that credit ratings agencies are the very entities that hold the power to downgrade the U.S. Treasury debt -- or tip Greece into the "default" category.

It's important that we find a room on the center stage of our attention for three companies with that much power.

First published in Newsday

Lobbyists hover over Wall Street rules changes

For those of us who wonder whether Washington can erect sufficient safeguards against a future global financial meltdown, the news this week is hopeful.

The Center for Responsive Politics, an organization that tracks spending by big lobbying groups, says that Wall Street and the financial industry spent more trying to influence Washington in the first three months of 2011 than during the same period last year.

Maybe that doesn't sound like a good sign, but where there's cash, there's agita. The $27 million shelled out this year by banks, credit unions, investment firms and their trade groups signals concern that the Wall Street Reform and Consumer Protection Act of 2010 -- also known as Dodd-Frank -- will be strict.

Lobbying is up 2.7 percent, which is remarkable considering how much lobbying was going on last year, when the bill was in the heat of a Congressional debate. Lobbyists' focus has shifted to the regulatory agencies drafting the details -- expected to stretch to 5,000 pages by the time the law takes effect in July.

As the pressure mounts in the next few weeks, Americans should keep a careful watch over the process. This is an industry with a particularly strong influence -- and one that hasn't paid much of a price for the damage it's caused. The industry's intensified lobbying effort doesn't hint at a Wall Street that's chastened. Quite the opposite.

Michigan Democrat Sen. Carl Levin has just produced a report saying that Goldman Sachs executives may have misled Congress about the company's mortgage stock bets at the expense of the firm's clients. Yet the report has sparked little outcry -- save for that of hypercritic former Gov. Eliot Spitzer, now a CNN pundit, who said that Attorney General Eric Holder should resign if he does not pursue criminal charges against Goldman.

For most of Washington, though, it appears sometimes that "saving" the financial industry is more important than equal treatment under the law.

"We're going through Dodd-Frank literally line by line," said Rep. Michael Grimm (R-Staten Island), a freshman who campaigned on now-distant tea party promises to slash government spending and stop economic bailout efforts. "We don't want to be a burden on a sector that quite frankly is extremely important," he said.

Grimm is a member of the House Financial Services Committee, which is considering an industry-friendly bill that would delay implementation of rules on derivatives trading -- that wellspring of toxic assets that were so instrumental in the 2008 housing market crash.

Another bill would water down the structure of the nascent Consumer Financial Protection Bureau, replacing a single director with a five-person commission. The commission would include a maximum of three from each political party. Hello, gridlock.

The most pitched battle is over a cap on debit card swipe fees, a business that ballooned to $16.2 billion in 2009 as people have come to rely on plastic for everyday purchases. Banks and credit card companies charge retailers a fee every time someone uses a debit or prepaid card, and businesses pass those costs on to consumers through generally higher prices. All in all, it has a depressing effect on an already sluggish economy.

The average debit card transaction costs only about 4 cents to process, yet banks, MasterCard and Visa charge store owners about 44 cents per transaction. Regulators recommend a 12-cent maximum fee, which they believe is "reasonable and proportional" to the actual cost.

But reasonable and proportional may be alien concepts for people who are spending $9 million a month in campaign money, constituent visits, endorsement letters and media campaigns in legislators' home districts. Brazen -- now that's more like it.

First published in Newsday