The major ratings firms haven’t changed their models yet, despite the chaos they’ve caused. But that could change this fall.
The possibility for substantive change in the ratings agency world has grown stronger, especially now that the Senate has a bill to review that will challenge how such firms do business. The flipside of this, though, is that it’s possible that by the time the final language of this bill is put before President Obama it will be somewhat toothless, offering to pass a patchwork of protections but leaving the fundamental problem of how the major ratings agencies operate untouched.
First some background. The bill, introduced May 19, is called the Rating Accountability and Transparency Enhancement Act of 2009, which forms the nifty acronym RATE. The sponsor is Sen. Jack Reed, D-R.I., the chairman of the Banking Subcommittee on Securities, Insurance and Investment. Currently the bill has been referred to committee, but has not been voted upon by the Senate or House.
On its face the bill contains some fairly strong language, pointed at the major ratings agencies: Fitch Ratings, Moody’s Investor Services, Standard & Poor’s Ratings Services (owned by The McGraw-Hill Companies) and A.M. Best. Reed says the new legislation would give the Securities and Exchange Commission new authority to oversee ratings firms, and hold them accountable for conflicts of interest. The bill also opens the door for investors to sue such firms for “knowingly or recklessly” failing to review key info during the ratings process.
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