Today, Congressman Brad Sherman (D-CA), a senior member of the House Financial Services Committee, applauded the approval of a proposal he first offered in 2009 to require the Securities and Exchange Commission (SEC) to end conflicts of interest in the selection of credit ratings.
Congressman Sherman has long argued that perhaps the single greatest cause of the financial meltdown was the decision of the credit rating agencies to give high ratings to bonds backed by questionable mortgages. Last week, Sherman appeared before the conference committee on financial regulatory reform to encourage the adoption of a measure, which he proposed in the House and which U.S. Senator Al Franken (D-MN) added to, introduced and successfully passed in the Senate. The Franken-Sherman amendment would require an independent agency to assign credit rating agencies impartially.
The final financial regulatory reform bill requires the SEC to create a Board to assign qualified credit rating agencies to rate bond issuances. This compromise embraces the Franken-Sherman proposal.
"We cannot continue to have a system where credit rating agencies compete with each other to secure large fees from bond issuers by giving high ratings to bad bonds," said Congressman Sherman.
"Allowing those who are selling bonds to select the credit rating agency that will rate those bonds is like allowing the home team to choose the umpire. In the parlance of finance, they gave AAA to "Alt-A'. That is to say, they gave their highest rating to riskier securities backed by non-prime mortgages," Sherman added.
As outlined in the conference committee report, the SEC is to establish a Board to assign rating agencies to issuers. Credit rating agencies would prosper not by wooing issuers with implicit promises of an easy grade, but rather by convincing the Board that they are qualified to produce accurate ratings.
The final bill still requires final approval by the full House and Senate before it can be sent to President Obama for his signature.