The House-passed rewrite of financial regulation is a disappointment for investors and taxpayers. But one portion of the bill represents significant reform—and a vast improvement from an early draft we described in October.
Congressmen Barney Frank and Paul Kanjorski (D., Pa.) have produced legislation that would likely end the credit-ratings racket enjoyed by Standard & Poor’s, Moody’s and Fitch. During the housing bubble, these government-anointed judges of credit risk slapped their triple-A ratings on billions of dollars of mortgage-backed securities. The consequences for investors were catastrophic.
The Frank-Kanjorski provision that recently passed the House not only eliminates all laws that require the use of these “Nationally Recognized Statistical Ratings Organizations.” The bill also instructs all the major financial regulators to remove such requirements from their rules. This is a subtle but enormously important change from the October draft, because most of the federal edicts that guaranteed profits for S&P and the gang were contained in agency rules, not laws.
The credit rating agencies have largely escaped criticism for the crisis in the financial sector, ironic since they’re a lot more responsible for it than the banks and investment companies that’ve been criticized so harshly over the last year or so.
Alas, the political value in blaming “greedy bankers” far exceeds that of blaming nerdy CFA’s.
In fact, if you were, well, you know, a cycnic, you might even think Washington played it this way on purpose.
I read a broad swathe of econ guys, and I think that quite a few have placed the credit rating agencies as a top problem. They did not create the problem, but they were supposed to be the brake in the system. I am in favor of doing away with laws requiring using these three agencies. I am not sure if this is enough. The ratings agencies are still paid by the people they rate. If we assume this change means more agencies competing, does it not risk having banks/insurance companies being able to shop at more places for a better opinion? Would it necessarily prevent groupthink?
Steve