Logos of rating agencies Moody's, Fitch Ratings, and Standard & Poor's
Logos of rating agencies Moody's, Fitch Ratings, and Standard & Poor's - 
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KAI RYSSDAL: No less a figure than former Treasury Secretary Robert Rubin weighed in on the subprime meltdown and the credit crunch today. At a conference in Washington, Rubin said on balance, the upsides of things like mortgage-backed securities outweigh the negatives.

Elsewhere in town, senators were having none of it. At a hearing this morning, they tore into the three major credit rating agencies -- Fitch, Moodys and Standard and Poor's -- over their roles in the crisis. At the same time, the SEC said it's investigating conflicts of interest.

Marketplace's Amy Scott reports.

AMY SCOTT: Senators said the rating agencies waited too long to downgrade mortgage-backed securities when their values began to plummet. Republican Sen. Jim Bunning of Kentucky blamed the business model: The Big Three agencies are paid by the companies whose bonds they rate.

SEN. JIM BUNNING: That is like a movie studio paying a critic to review a movie, and then using a quote from his review in the commercials.

Sean Egan has been saying as much for years. He co-founded the rating agency Egan Jones, which charges investors for its ratings. Egan says that frees his analysts from pressure to inflate ratings. His firm downgraded Enron long before its big competitors did.

SEAN EGAN: Along with WorldCom, Global Crossing, Genuity, Delphi... You know, the list goes on.

In the hearing today, executives from Moody's and S and P defended their business model. They said analysts are paid for the quality of their research, not the revenue generated by their ratings. Michael Kanef with Moody's told the panel the issuer-funded model allows firms to share their ratings with all investors.

MICHAEL KANEF: If an investor-pay model is adopted, the fact that the rating is made publicly available to regulators, to governments, to other investors would not necessarily remain in place.

New rules to make the industry more transparent kicked in just a few months ago. The law requires agencies to disclose their methods and gives the SEC more oversight. Senators said today they'd like to give the new law a chance before imposing more regulation.

In New York, I'm Amy Scott for Marketplace.

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