Is Congress missing the boat on credit raters?

By Neil Shah - Analysis

NEW YORK (Reuters) - If lawmakers and regulators are hoping to put pressure on credit-rating firms for their role in the subprime mortgage crisis, they may be going about it the wrong way.

The Securities and Exchange Commission is investigating whether Wall Street bankers, peddling securities linked to risky subprime mortgages, unduly influenced Moody's Corp (MCO.N: Quote, Profile, Research, Stock Buzz), Standard & Poor's and Fitch Ratings, by pushing for top-notch ratings on bonds that have since been downgraded and plummeted in value.

The investigation sparked debate in the Senate Banking Committee on Wednesday over whether the structure of the ratings industry should be changed so that investors pay for ratings instead of bond issuers.

But the lawmakers' focus on conflicts of interest may end up diverting attention from more useful reforms that could revamp ratings in the $3 trillion global structured finance market.

"They're already coming up with distraction solutions, instead of getting to the heart of the problem," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm.

Glenn Reynolds, analyst for fixed-income research service CreditSights, also thought lawmakers and regulators may be barking up the wrong tree.

"I really don't think (the potential conflict issue) is the critical swing factor. The critical swing factor is quality. The quality comes from either regulation, because you demand it -- and that's hard to regulate -- or because you open up the market to competition," he said.

S&P, a unit of McGraw-Hill Cos Inc. (MHP.N: Quote, Profile, Research, Stock Buzz), has said it is taking steps to ensure its ratings are sound.