On Thursday Eric Kolchinsky will testify about ratings-firm reform before the House Committee on Oversight and Reform.  The former analyst for Moddy's (he left the firm last week after being suspended) is likely to become a bit of a star witness for those who are concerned that ratings agencies have been boosting ratings.  The Wall Street Journal reports today that Kolchinsky told Congressional investigators that Moody's continues to issue inflated ratings of "complex debt securities."

Last week the Securities and Exchange Commission approved a set of new rules designed to give the commission more oversight of credit ratings agencies.  If Kolchinsky's testimony is well received, it could mean Congress pushes for further regulation of the agencies.  The New Yorker's James Surowiecki is among those who believes the credit agencies share some responsibility for the housing bubble by giving high ratings to "dubious mortgage-backed securities."  Surowiecki writes, that while the SEC's move last week was a positive step in that it helps in resolving conflicts of interest...

...there’s a much bigger problem, which is that, even though nearly everyone knows that the agencies are compromised and exert too much influence, the system makes it impossible not to rely on them. In theory, of course, the mere fact that a rating agency says a particular bond is AAA (close to risk-free) doesn’t mean that investors have to buy it; the agencies’ opinions should be just one ingredient in any decision. In practice, the government’s seal of approval, coupled with those regulatory requirements, encourages investors to put far too much weight on the ratings. According to a recent paper on the subject by the academics Darren Kisgen and Philip Strahan, that’s true even when the agency doing the rating doesn’t have a long track record. During the housing bubble, investors put a huge amount of money into AAA-rated mortgage-backed securities—which would have been fine had the rating agencies’ judgments been sound. Needless to say, they weren’t. Despite subprime borrowers’ notoriously shaky finances, the agencies failed to allow for the possibility that housing prices might fall sharply.

Read Ratings Downgrade here.