continuing to react to the mortgage crisis be creating new laws, one more law is on the books. Earlier Thursday, senators dealt a blow to the nation’s largest credit-rating agencies, approving tough new rules for the industry and voting to remove the government’s formal endorsement of a handful of firms.
Sen. Al Franken (D-Minn.) had taken aim at what he called “staggering conflicts of interest” in the current structure, in which issuers of financial products can shop for the most favorable ratings. Because issuers also pay the ratings agencies for their services, Franken said, the agencies have an incentive to give securities a higher rating than warranted.
“This conflict of interest has cost American investors and pensioners billions and billions of dollars,” Franken said, “because supposedly risk-free investments have failed or been downgraded to junk status.”
Franken’s measure seeks to end the practice of shopping for ratings by creating a clearinghouse regulated by the Securities and Exchange Commission. Financial companies seeking to have a new security rated would be assigned a rating agency by the clearinghouse. Firms could then seek out subsequent ratings on their own, but any discrepancies between the ratings would be made public.