New Bill to Regulate Credit Rating Agencies
Cited: AP
Pre-economic crisis, credit rating agencies judged investments backed by mortgages to be a safe investment. Surging home prices led investors to invest trillions of dollars into something that was not safe because the investments backed by the riskiest mortgages. Then the agencies downgraded those by the billions and it helped trigger a financial crisis.
The financial overhaul bill before Congress aims to hold the agencies accountable for sloppy analysis that produces inaccurate ratings.
Yet it barely addresses the agencies’ central conflict of interest: They’re paid by institutions whose products they rate. Critics say the agencies yielded to pressure to give high ratings to risky investments.
Here are some questions and answers about how rating agencies would be affected by the bill, which Congress is expected to approve:
Q: How would the bill help make the agencies’ ratings more accurate?
A: The agencies could be sued if they recklessly ignored an investment’s risks in assigning a grade. It’s impossible to sue them now. Ratings are considered constitutionally protected free speech.
The agencies would face tighter regulation. A new office within the Securities and Exchange Commission would examine them every year and could fine them for breaking its rules. An agency’s right to issue some kinds of ratings could be revoked if the agency’s ratings too often proved inaccurate.
The agencies also would have to disclose more information about their track records and rating methods.
Q: How would these rules affect financial institutions?
A: Banks will be discouraged from shopping around for an agency that will give the highest rating. The exact method will be decided after regulators study the issue. One option is to have rating agencies assigned randomly, in a process overseen by regulators.
Banks and investment companies might sue agencies that issue inaccurate ratings.
Big investors, like pension funds and asset-management firms, will know more about how agencies assign ratings. That might lead them to shift investment strategies.
Q: How would the changes affect ordinary people?
A: Pension and mutual funds will have better information about where to invest their clients’ money, supporters say. That could make them more stable and profitable.
Individual investors will understand the ratings better. They will now be able to learn, for example, whether an agency’s former employees now work for a bank that received high ratings. That might help them spot potential conflicts and avoid investment losses.
But if more investment companies choose to do their own research, mutual fund fees could rise.
Q: Where does the bill fall short?
A: It fails to fix the conflict of interest at the heart of the credit raters’ business model: They’re paid by the same institutions whose investments they are rating. Many lawmakers say the agencies issued high ratings before the crisis because of pressure from banks and because the agencies wanted more of their business.
Congress failed to include in the final bill a proposal to randomly assign banks to credit rating agencies. That way, banks couldn’t shop for an agency with the easiest standards. Instead, regulators will study the issue and decide what rules to issue.
Unfortunately, critics of the bill believe that the changes of increased regulation and legal liability will make the agencies seem more trustworthy, even if they do not deserve that trust, giving investors a false sense of security.
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My Take: I think they should have started that regulation sooner. Then we would not have gotten into a economic downturn. My question is as wide commercial mortgage financing companies get into this mess. I know that mortgages can be a great investment for company, but if they had any inkling that they were not secure, then they should not have gotten into it. Even in this bad economy, commercial real estate financing is a money making opportunity.
Unfortunately, for those whose company failed, they are now looking at a career change. They have now joined the many job seekers across the country looking for a new job. Hopefully, if they have a FHA loan Louisville KY, they will not lose it because they don’t have the money to make payments. Of course I could always get KY refinancing that may save your home.
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