The two biggest credit rating agencies denied that they gave inflated ratings to sub-prime mortgage debt and other discredited bonds in order to attract more lucrative business from Wall Street banks.
The defence of their agencies' role in the credit crisis came as executives were hauled over the coals by US lawmakers on Capitol Hill, who said the agencies were riddled with conflicts of interest and should shoulder much of the blame for inflating a bubble in the credit markets.
Executives from Standard & Poor's and from Moody's appeared yesterday before the powerful Senate banking committee, one of several bodies investigating the rating agencies' role as arbiters of the creditworthiness of the mortgage-backed bonds created by Wall Street banks in record numbers.
Home loans taken out by low-income Americans have been parcelled up and used to back exotic new debt instruments, many of which were given credit ratings equivalent to US government bonds – suggesting they were practically guaranteed never to default. As millions of borrowers got into arrears, however, the bonds have all collapsed in value, causing global disruption.
At the heart of the controversy is the fact that it is the Wall Street banks that pay the agencies to rate the new products. One after another, Senators accused the agencies of giving artificially high ratings to ensure that the business did not go to their rivals.
Senator Jim Bunning, a Republican from Kentucky, described the process as "like a movie studio paying a critic to review a movie and then using a quote from his review in the commercials". A Democrat, Robert Menendez, said the agencies were "playing both coach and referee".
But Vickie Tillman of Standard & Poor's credit market services said that the agencies took every care to try to ensure accurate ratings, and that no analyst was ever paid according to the amount of business he or she generated, or the types of ratings given.
"S&P does not and will not issue higher ratings in order to garner additional business," she said.
Her comments were echoed by Michael Kanef, a managing director at Moody's, who insisted that the agencies followed published methodologies to reach their ratings. Yesterday, Moody's proposed the creation of an independent regulator to check the accuracy of data provided by borrowers and mortgage brokers, to improve confidence in the ratings process.
Christopher Cox, chairman of Wall Street's regulator, the Securities & Exchange Commission, had earlier told the committee that the SEC was looking into whether the agencies were "unduly influenced" by their financial relationships with Wall Street banks.
He said agencies have told the SEC that overly optimistic credit ratings stemmed not from a poor methodology or from conflicts of interest but because of the unexpected spike in arrears, the result of deteriorating lending standards and fraud by mortgage brokers. "We have as yet formed no firm views," Mr Cox said.