The mainstream ratings agencies admitted yesterday that they had assigned ratings on many mortgage-related securities that were far too high.

At a congressional hearing into the agencies' role in the crisis, Deven Sharma, the president of Standard & Poor's, said: “We appreciate the seriousness of the current dislocation in the capital markets and we recognise that many of the forecasts we used in our ratings analysis of certain structured finance securities have not been borne out.

“It is by now clear that a number of assumptions we used in preparing our ratings on mortgage-backed securities did not work. There is no doubt that had we anticipated the extraordinary events that have occurred - and we did not - we would have utilised different economic forecasts and would not have assigned many of the original ratings that we did.”

The Securities and Exchange Commission is working on new rules designed to reduce conflicts of interest and force greater disclosure from the agencies. Furthermore, it is proposing changes that could reduce the status of ratings agencies in financial markets, including making it possible for money-market funds to buy short-term debt without the requirement that it be highly rated by the agencies.

In June the three big agencies agreed to work with Andrew Cuomo, the New York attorney-general, to overhaul how they evaluate investments backed by high-risk debt.

Jerome Fons, a former managing director of Fitch's credit policy division, said that there was a need for strong reforms of the way the ratings industry operates: “A large part of the blame can be placed on inherent conflicts of interest found in the issuer-pays business model,” he said. “A drive to maintain or expand market share made the ratings agencies willing participants in this shopping. It was also relatively easy for the major banks to play the agencies off one another because of the opacity of the structured transactions and the high potential fees earned by the winning agency.”

Mr Fons added that, although the methods used to calculate some credit ratings have come under fire, it is the business model - where the debt issuer pays the agency for assigning the rating - that is the chief culprit in preventing analysts from putting investors' interests first.

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