Wall Street has been accused of contributing to the credit crunch through fraud as America’s financial watchdog announced an investigation into whether underwriters of mortgage-backed bonds “unduly influenced” the ratings agencies to ignore their risks.

The Securities and Exchange Commission’s investigation into whether the issuers and underwriters of securities backed by sub-prime bonds put pressure on the ratings agencies emerged as the agencies began a two-day congressional hearing into their role in America’s mortgage meltdown.

The hearing forms part of an ever-widening inquiry into the cause of the surge in defaults in the spring, which has escalated into a widespread credit crunch.

The SEC is investigating whether ratings agencies such as Moody’s and Standard & Poor’s turned a blind eye to the risks attached to pools of sub-prime-backed bonds, known as collateralised debt obligations, and other mortgage securities. The regulator is also looking into whether the agencies inflated their rankings on the bonds, many of which continued to receive the top AAA grade despite heavy exposure to high-risk home loans.

The agencies are paid hefty fees for their ratings and, the SEC reasons, may have been tempted to bless increasingly high-risk issues in the hope of continuing the flow of business despite a decline in the quality of the underlying mortgages.

As default rates surged to the highest on record in recent weeks, S&P and Moody’s have reduced their ratings on at least 500 mortgage-backed securities.

Opening the congressional hearing yesterday, Christopher Cox, chairman of the SEC, said: “The credit rating agencies have been heavily criticised regarding the accuracy of their ratings, especially sub-prime residential mortgage-backed securities.

“We have as yet formed no firm views on any of the reasons put forth by the credit rating agencies but we are carefully looking into each of them. In particular, the SEC is examining whether they were unduly influenced by issuers and underwriters of residential mortgage-backed securities,” he added.

The agencies came under fire from senior politicians yesterday, including Senator Jim Bunning, a Republican from Kentucky, who described the ratings process as “like a movie studio paying a critic to review a movie and then using a quote from his review in the commercials”.

Moody’s and S&P strenuously defended their actions. Vickie Tillman, executive vice-president of credit market services at S&P, said: “There is no evidence, none at all, to support Mr Bunning’s contention.” She said allegations that S&P inflated ratings in pursuit of fees were “not true”.

Ms Tillman defended the practice of working with companies when rating their securities, even in cases when the discussion is about the effect that different structurings of the debt would have on its credit rating. “S&P does not tell issuers what they should or should not do,” she said.

Michael Kanef, managing director of Moody’s asset finance group, added that his company had “successfully managed related conflicts of interest and provided the market with objective, independent and unbiased credit opinions”.

America’s mortgage meltdown has led to tens of billions of dollars in losses that have hit shareholders, Wall Street and high street banks, hedge funds and home loan groups. It has also led to 50,000 mortgage-related job losses in America.

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