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This is a big victory for financial reform:

The Senate on Thursday voted to impose tighter regulations on credit-rating agencies, which have been criticized for misjudging the risks of debt instruments at the core of the 2008-2009 financial crisis.

The vote total is rather surprising, given that the amendment did not have the support of Chris Dodd:

The measure passed over the objections of Democratic Senator Christopher Dodd, who is overseeing the financial rewrite. He said the idea had merit but required further study to ensure that it would not have unintended consequences across the financial industry.

The proposal would set up a government clearinghouse to assign firms like Moody's Corp, Standard & Poor's and Fitch Ratings to rate an issuer's debt.

Chris Bowers at Open Left had a good summary of the amendment this morning:

Making the bill stronger: Sen. Franken (D-Minn.) creates a Credit Rating Assignment Board which would assign the credit rating agency that does each initial rating in order to reduce the inherent conflict of interest in the current business model - where the person who hopes to sell the rated product pays the rater.  This amendment stops securities issuers from shopping around among credit rating agencies for the best rating, leading raters to inflate their grades as they scrap for market share.

Why it matters: Credit Rating Agencies got paid to slap AAA ratings on packages of dangerous investments they did not even try to understand or evaluate. Their triple A ratings created huge markets for these investments, and spread them through every corner of the market. When the House of Cards built on their false promises collapsed, millions of Americans lost their savings.

The financial reform bill gets stronger and stronger by small increments. This is a good result. Let's hope there is more like it to come.


You can find Franken's statement on the amendment at his website. Here's a brief summary from that statement:

Specifically, my amendment creates a Credit Rating Agency Board – a self-regulatory organization – tasked with developing a system in which the Board assigns a rating agency to provide a product’s initial rating.  Requiring an initial credit rating by an agency NOT of the issuer’s choosing will put a check on the accuracy of ratings.

My amendment leaves flexibility to the Board to determine the assignment process.  But, the Board will be inclined to make the process one that incentivizes accuracy, because representatives of the investor community will make up a majority of the Board—for example, pension fund managers and endowment directors.  Folks that have a vested interest in the AAA bonds they’ve selected actually performing as AAA bonds.  The Board gets to design the assignment process it sees fit—it can be random, it can be based on a formula, just as long as the issuer doesn’t get to choose.

The Board will select a subset of credit rating agencies to be eligible for the assignment pool.  The Board will be required to monitor the performance of the agencies in the pool.  If the Board so chooses, it can reward good performance with more rating assignments.  It can recognize poor performance with fewer rating assignments.  If the rater is bad enough, that might even be zero assignments.

Late Update: Please see RJ Eskow's excellent diary laying out exactly why this amendment was so important.


Latest Update: Yet another good amendment was passed today:

Striking at a lucrative bank business, the Senate on Thursday voted to force credit card companies to reduce fees for debit card transactions and permit merchants to offer customer discounts based on their payment method...

The vote was a major defeat for banks, which lobbied hard against it. But the measure attracted heavy bipartisan support and surpassed a 60-vote threshold for passage. Seventeen Republicans voted for the amendment; 10 Democrats voted against it.

This probably deserves its own diary.

Originally posted to MeMeMeMeMe on Thu May 13, 2010 at 10:47 AM PDT.

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