WASHINGTON — The Senate took strong steps Thursday to fix a key cause of the recent financial crisis, approving measures to limit the ability of Wall Street firms to shop around for favorable ratings from now-discredited credit rating agencies.
Lawmakers approved two rating-agency amendments to a sweeping overhaul of financial regulation, despite objections from Senate Banking Committee Chairman Christopher Dodd, D-Conn.
Moody's Investors Service, Standard & Poor's and Fitch Ratings were all key players in the nation's financial meltdown, giving blue-chip ratings to complex mortgage-backed bonds that turned out to be junk.
A McClatchy investigation last October revealed how Moody's and its competitors sold out investors by trading their ratings for huge fees that came from rating complex deals.
Sen. Al Franken, D-Minn., offered an amendment aimed at putting an end to this Wall Street behavior that passed on a bipartisan 64-35 vote.
"They shop around for their ratings. They select those agencies that tend to offer them the best ratings, and threaten to stay away from rating agencies that are too tough on them," Franken said.
His amendment would instruct the Securities and Exchange Commission to create a credit-rating board, composed mostly of investors, that would assign rating agencies to rate asset-backed securities such as bonds backed by mortgages.
That would go further than Dodd's original proposal to create an office within the SEC that would regulate rating agencies and inspect them annually.
Rating agencies warned Thursday of unintended consequences.
"Credit rating firms would have less incentive to compete with one another, pursue innovation and improve their models, criteria and methodologies. This could lead to more homogenized rating opinions and, ultimately, deprive investors of valuable, differentiated opinions on credit risk," Ed Sweeney, an S&P spokesman, told McClatchy.
"Most important, having the rating agency assigned by a third party, whether the government or its designee, could lead investors to believe the resulting ratings were endorsed by the government, thereby encouraging over-reliance on the ratings."
Moody's also voiced concern.
"Moody's supports the goals of enhancing the transparency and accountability of the ratings process, and we are hopeful that the final legislation will achieve these goals while avoiding unintended consequences for market participants," spokesman Michael Adler said.
Many lawmakers thought Franken's plan wasn't tough enough.
"Let's not go halfway. Let's go all the way," said Sen. George LeMieux, R-Fla. He offered an amendment to Franken's plan that would instruct the Federal Deposit Insurance Corp. and other government agencies that now rely on ratings to determine creditworthiness to develop other measures in order to achieve the same end.
"Why should we reward them and allow them to continue to have what, in effect, is a government-sponsored monopoly?" LeMieux asked.
The Senate approved his amendment 61-38.
The tough amendments could be stripped out when senators and members of the House of Representatives meet to resolve differences between their competing bills in coming weeks.
Dodd made it clear Thursday that he was unhappy.
His bill, he said, already had 40 pages of changes involving rating agencies. Under it, the SEC would have a new Office of Credit Rating Agencies to "regulate and promote accuracy in ratings," staffed with experts in municipal debt and finance.
In addition, Dodd said, the SEC ''will have expanded authority to suspend registration of agencies that consistently produce ratings without integrity."
Even some critics of rating agencies think senators may have gone too far.
"The idea of a government agency apportioning business among all the agencies sounds a bit Soviet to me. While it may reduce the conflicts inherent in the issuer-pays model, I'm not sure that it would actually result in ratings that are more accurate," said Scott McCleskey, a former compliance director at Moody's.
As for LeMieux's amendment, McCleskey said: "Removing statutory references to ratings may satisfy our urge to take a swing at the rating agencies, but it won't dent their business. The market relied on ratings long before the government endorsed them, and the market will continue to do so."
Rating agencies may still face another tough amendment, this one from Sen. Carl Levin, D-Mich, who recently chaired an investigative hearing on the agencies. He proposes allowing the SEC to regulate the methodology that rating agencies use, and he'd require that greater credit risk be assigned to products that lack historical performance data, such as complex mortgage bonds.
Some states, too, are going after the rating agencies.
New York Attorney General Andrew Cuomo confirmed this week that his office is looking at how complex deals were assigned investment grades. Connecticut Attorney General Richard Blumenthal sued the rating agencies in March, alleging that they assigned "tainted ratings." California Attorney General Edmund Brown also is probing the agencies.
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