Jules Kroll, a former private investigator who started abond-rating company after the financial crisis, said the largestcredit-rating firms are again putting profits ahead of accuracyamid record demand for corporate debt.

“They're selling themselves out just as they did before,” thechief executive officer of Kroll Bond Rating Agency Inc. said todayat a U.S. Securities and Exchange Commission roundtable inWashington. “If you want to see the next tsunami, wait for theoutcome in high yield and watch what washes up on shore.”

Companies are issuing speculative-grade bonds at a record paceeven as yields on the debt have fallen to unprecedented lows withthe Federal Reserve holding its benchmark interest rate near zerofor a fifth year. Douglas Peterson, president of Standard &Poor's Ratings Services, declined to comment on whether the marketis in a “bubble.” Prices reflect excess liquidity, he said inresponse to a question from SEC Commissioner Daniel M.Gallagher.

Regulators are meeting today to discuss the merits of a plan tocreate a board that would select ratings firms to grade structuredproducts, which was proposed by Senators Al Franken from Minnesotaand Roger Wicker of Mississippi in the 2010 Dodd- Frank Act. Theproposal was intended to mitigate conflicts of interest that stemfrom issuers of debt shopping around for the most advantageousgrades.

Peterson said that plan would introduce “new conflicts” andwould be slow to implement.

“A government assignment system could create uncertainty, couldslow down markets, and disrupt capital flows at a time when wecould least afford it,” Peterson told the group.

Franken pressed the SEC to change the system, noting his planhad bipartisan support in the Senate before it was watered down ina conference committee. He blamed the ratings companies for notdoing their jobs, contributing to a housing crash that causedmillions of Americans to lose their employment.

“My plea today is that you take action,” Franken said. “If wemaintain the status quo we are leaving ourselves far too vulnerableto another catastrophe.”

S&P, Moody's Investors Service and Fitch Ratings, the threebiggest credit graders, were “key enablers of the financialmeltdown,” the Financial Crisis Inquiry Commission, created byCongress with a 10-member bipartisan board, said in its January2011 report. “This crisis could not have happened without therating agencies.”

Cutting Reliance

The commission's report also blamed the crisis on lenders'irresponsible and sometimes fraudulent practices; regulators'inattention and overconfidence; and the recklessness of borrowersand investors.

Representative Scott Garrett, a New Jersey Republican, said theSEC should focus on finishing regulations that strip out referencesto credit-rating companies from its rulebooks. The regulator isrequired under Dodd-Frank to remove language that refers investorsto the rating firms' grades when selecting safe investments.

“I do not believe that having the government assign which firmswill do the ratings is the right answer,” Garrett told theroundtable participants. “By removing the government goodhousekeeping seal of approval, we can increase competition amongratings agencies and lessen reliance on ratings.”

Kermit Roosevelt, a professor of constitutional law at theUniversity of Pennsylvania, said a system that strictly forbid bondissuers from picking and paying a company to rate the securitiescould be unconstitutional.

“That is a prohibition on speech, and that I think is moreconstitutionally vulnerable,” Roosevelt said.

Companies have sold $162.9 billion of speculative-grade bonds inthe U.S. this year, up from the $132.8 billion sold by this time in2012, when a record $358.9 billion was issued, according to datacompiled by Bloomberg.

Yields on speculative-grade bonds, rated below Baa3 by Moody'sand lower than BBB- at S&P, touched a record low 5.98 percenton May 9 before climbing to 6.07 percent as of yesterday, accordingto the Bank of America Merrill Lynch U.S. High Yield Index.

Bloomberg News

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