From Pine View Farm

The Quest for Ratings 0

Senator Al Franken proposes an amendment to the Financial Reform bill to change how the investment ratings system works.

Remember that the ratings companies, who are paid by the outfits that issue the stuff that they rate, looked at junk and rated it AAA–“good as gold”–time and again.

Without that AAA rating, the junk would not have sold. The issuers, Goldman Sachs and the like, would shop around and play the ratings agencies off against each other.

The ratings outfits were crucial enablers of the junk derivatives market, and it was Wall Street’s desire to have derivatives to package into bonds that fed the housing bubble:

more mortgages–>more derivatives–>more bonds–>
more sales–>more commissions–>more bonuses.

The Franken amendment looks like a good start.

Franken and fellow Democratic Senators Charles Schumer and Bill Nelson, with Republican Senator Roger Wicker, have filed a proposed amendment to the bill authored by Senator Christopher Dodd, asking for checks and balances on the “issuer pays” model for rating agencies.

The proposed bipartisan amendment is picking up broad support, including the endorsement of the Consumers Union consumer advocate group, Franken’s office said.

The amendment would set up a Credit Rating Agency Board that would choose which rating agency would rate an issuer’s debt. If such a board selected agencies arbitrarily, that could make ratings more impartial, some analysts say, even though the issuer would still pay the agency.


Comments are closed.