Wall Street faces allegations that it fraudulently contributed to the credit crunch as America’s financial watchdog announced a probe 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 high-risk subprime bonds lent 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 probe 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 subprime-backed bonds, known as collatorised debt obligations, and other mortgage securities.

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The SEC is looking into whether the ratings agencies inflated their rankings on the bonds, many of which continued to receive the top AAA grade despite heavy exposure to high risk homeloans.

The agencies get paid hefty fees for their ratings and 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, the SEC reasons.

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 today, Mr Cox said: "The credit rating agencies have been heavily criticised regarding the accuracy of their ratings..especially subprime 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 [the agencies] were unduly influenced by issuers and underwriters of RMBS [residential mortgage-backed securities," he added.

The agencies came under fire from senior politicians today, 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".