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Thursday, September 24, 2009 10:57:13 PM

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Raters Face Fresh Push in House Over Claims
SEPTEMBER 25, 2009
By SERENA NG, SARAH N. LYNCH and LESLIE SCISM

Credit-ratings firms came under pressure as lawmakers and regulators renewed scrutiny of the ratings process.

A congressional committee called on Moody's Corp. to respond to allegations its Moody's Investors Service unit continues to inflate credit ratings. Meanwhile, state insurance regulators gathering in National Harbor, Md., grilled executives of major ratings firms about their botched analysis of mortgage bonds and discussed ways to pare ratings firms' role in assessing risk.

Moody's shares slid 4.4% on Thursday and have tumbled 28% this month amid scrutiny of the firm. Former Moody's analyst Eric Kolchinsky went public earlier this week with allegations that the firm knowingly gave inaccurate ratings to complex securities this year. The House Oversight and Government Reform Committee on Thursday released a letter written by Mr. Kolchinsky detailing his complaints to Moody's officials.

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Document: Kolchinsky's memo to Moody's compliance officer A Moody's spokesman said the company "takes very seriously all allegations of impropriety," and a review into Mr. Kolchinsky's most recent claims is in process. The spokesman said Mr. Kolchinsky's previous claims were found by Moody's to be unsupported. "Moody's has strong policies in place to manage potential conflicts of interest," the spokesman said.

Committee Chairman Edolphus Towns (D., N.Y.) on Thursday postponed a scheduled hearing at which Mr. Kolchinsky was to testify, and said he wants Moody's to respond to the allegations.

Rep. Towns slated the new hearing for next Wednesday. The Moody's spokesman said the company "intends to continue the ongoing dialogue it maintains with legislators, regulators and other market participants."

In the 14-page letter released by the committee, Mr. Kolchinsky said Moody's engaged in conduct he believed was illegal and he urged the firm "to take action" to prevent the company from being held liable for its ratings.

In an interview Thursday, Mr. Kolchinsky said the tone of the August memo was out of character for him, but he was frustrated by what he felt was a lack of action within the company.

"The reason it was so harshly worded is that I really wanted them to act and do something, and not sit on their hands," he said, adding that he tried to get his message across for the past two years.

As his primary example, Mr. Kolchinsky said Moody's gave a high rating to complicated debt securities in January 2009, knowing that it was planning to downgrade assets that backed the securities. Within months, the securities were put on review for downgrade. He said he had reviewed internal Moody's memos that showed executives had approved ratings methodology changes in December 2008 that they expected to lead to large-scale ratings downgrades.

He also wrote that he fears that conflicts of interest, which arise because Moody's is paid by debt issuers to rate securities, have become worse in recent months. The group that rates complex securities takes "analytical short-cuts in their quest for revenue," he wrote.

Shares of McGraw-Hill Cos., owner of ratings firm Standard & Poor's, have tumbled 28% this month, falling 6.5% Thursday.

"It's clear to me we can no longer rely solely on the ratings agencies," Sean Dilweg, Wisconsin's insurance commissioner, said following the hearing of the National Association of Insurance Commissioners on Thursday in Maryland.

At the hearing, executives from Moody's, S&P and Fitch Ratings, which is owned by Fimalac SA of France, described changes they have made to improve their analytical processes, corporate governance and compliance.

"Everyone who testified knows that changes have to be made. It's just a question of what changes and to what extent," said James Wrynn, New York's insurance superintendent.

Write to Serena Ng at serena.ng@wsj.com and Leslie Scism at leslie.scism@wsj.com
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