WASHINGTON — The three major credit rating companies that were poised to decide whether to downgrade the nation's top-ranked debt standing are at the same time spending hundreds of thousands of dollars to lobby the Obama administration and Congress over the way the government regulates them.

Moody's, Fitch Ratings and Standard & Poor's, along with S & P's parent company, McGraw-Hill, have spent a combined $1.76 million since January to lobby Congress and federal agencies, much of it aimed at new regulations. The rules are part of the massive Dodd-Frank overhaul of the financial industry that Congress passed last year and federal agencies are still midway through rewriting many regulations to conform to the new law.

Even as the rating companies lobbied, they repeatedly warned that a failure by the White House and Congress to raise the nation's $14.3 trillion debt ceiling could force them to lower the high-level AAA ratings that the U.S. has maintained. The debt ceiling was raised Tuesday. But rating analysts could still slash U.S. credit values if they are dissatisfied with the details, a move that could shake the financial system.

Critics worry about the potential for conflicts of interest posed by the firms' dual lobbying and rating roles. “It's pretty obvious that the current system is imperfect and has conflicts of interest built in,” said David Dapice, an associate professor of economics at Tufts University. Dapice said he is skeptical that recent government reforms aimed at the industry will be effective.

The three firms are the main movers of the rating industry, long relied on by investors and governments to evaluate the credit of businesses and nations. For decades, the companies routinely gave the U.S. the highest debt rating but their sudden hesitation thrust them front and center into the midst of the default crisis.

Any downgrade of U.S. credit could spur a mass sale of Treasury bonds and undercut the government's ability to inexpensively fund its operations. That fear, critics warn, should not be on the minds of federal officials as they make decisions on how to regulate the ratings industry.

Rating industry officials and lobbyists counter that the companies are exercising their right to weigh in on a wave of legislation targeting them in recent years – first, for failing to warn about the 2001 collapse of the Enron energy company and then for missing mortgage banking abuses that led to the deep 2008 recession. Executives also say that strong internal reviews and firewalls ensure the soundness of their ratings and insulate their analysts from their Washington dealings.

None of the lobbying firms would discuss their work but one top lobbyist working for Moody's dismissed the notion that rating agencies' pending decisions on U.S. credit would bleed into their dealings with the government.

“You have to operate on the premise that, over time, the accuracy of their evaluations will show that the process is above board,” said Vic Fazio, a former California congressman and a senior lobbyist at Washington-based Akin-Gump.

In recent testimony to a House committee, senior executives from S & P and Moody's said their rating decisions are buttressed by the growing use of internal review panels, conflict-of-interest scrutiny and rotation of analysts.

Deven Sharma, S&P's president, noted the firm's “added checks and balances,” while senior Moody's executive Michael Rowan touted his company's “bolstering measures to mitigate conflicts of interest.”

Moody's would not comment on its lobbying but McGraw Hill, S&P's parent company, and Fitch both assured that their internal corporate walls prevented any conflicts. “There is a strict firewall that separates the two. Always has been, always will be,” said McGraw-Hill spokeswoman Patti Rockenwagner.

Daniel Noonan, a Fitch spokesman, said his firm “sometimes utilizes lobbyists but such corporate matters are completely separate from and have zero influence upon our analytical groups that assign ratings.”

Some former industry officials have questioned whether those internal measures are effective. In testimony to the House Oversight Committee in 2009, former Moody's Investors Service managing director Eric Kolchinsky said that compliance groups set up to deal with conflicts were often understaffed and inexperienced.

David Wyss, former chief economist at S&P and now a visiting fellow at Brown University, said his former firm tried hard to minimize conflicts. But “there's no way to have a complete firewall unless you keep people from reading the newspaper.”

Federal lobbying records show lobbying by McGraw-Hill, Moody's and Fitch has grown steadily since the mid-2000s as their ratings operations have come under increasing federal scrutiny. In 2005, the three firms spent more than $2.1 million total on lobbying. By 2010, it was $3.6 million.

Much of the lobbying has been defensive. The Credit Rating Reform Act of 2006, passed in the wake of the Enron collapse, strengthened Securities and Exchange Commission authority over the companies’ qualifications and records.

The firms were targeted again in 2009 by the Dodd-Frank bill which created a new ratings oversight office within the SEC and ordered federal agencies to rewrite their rules to minimize the government's use of ratings.

The SEC, Treasury, Internal Revenue, Federal Reserve and the Federal Deposit Insurance Corporation have all begun to move away from using the firms but are still modifying their regulations, officials said. The Federal Reserve said recently it had identified 46 references to ratings companies in its regulations but was still working on how it would reduce using the firms.

Both S&P and Moody's executives told Congress last week that their firms support removing such references. Still, as the rules are rewritten, lobbyists for the ratings firms are monitoring the process and at times, offering their own suggestions for rewrites.
Federal officials did not respond to requests for comment by phone and e-mail about how agencies were handling rating firms' lobbying while the companies prepare to rule on U.S. credit.