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“The leading credit rating agencies, Standard and Poor’s, Moody’s, and Fitch are the financial gatekeepers to the economy,” Representative Henry Waxman (D-Calif) Chairman of the Committee on Oversight and Government Reform, said during the hearing on credit rating agencies and the financial crisis.

Jerome Fons, former Executive of Moody’s Corporation, stated that the major rating agencies had missed the impact on subprime mortgages of falling house prices and declining underwriting standards. “A large part of the blame can be placed on the inherent conflicts of interest found in the issuer-pays business model and rating shopping by issuers of structured securities,” Fons said.

Raymond McDaniel, Chairman and Chief Executive Officer of the Moody’s Corporation, said that Moody’s published warnings about the increased risks and took action to adjust their assumptions for the portions of the residential mortgage banked securities market that were asked to rate. McDaniel went on to say that they did not anticipate the magnitude and speed of the deterioration in mortgage quality and quickness of restrictive lending.

Waxman concluded with “The credit rating agencies occupy a special place in our financial markets. Millions of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust, and federal regulators ignored the warning signs and did nothing t protect the public.”

Continuing the hearing process on the financial crisis,the members will hear from federal regulators, including SEC Chairman Christopher Cox, followed by a hearing with Fannie Mae and Freddie Mac on November 20th.