ADVERTISEMENTS

By now, most of our readers are familiar that the credit rating agencies have been accused of rating many mortgage-backed securities issued by the major banks with AAA ratings even though they consisted of bad mortgage loans and in return collecting their lucrative fees from the same banks.  As a result, many private and public institutions have blamed the major credit rating agencies such as Moody?s, S&P and Fitch Ratings for contributing to the financial crisis in their inherent conflict of interest with the major banks to collect their rating fees and at the same time, please the banks with their top ratings of mortgage-backed securities created by the banks.

Now, the U.S. Congress is in the middle of debating several amendments to curb that conflict of interest in connection with the Restoring American Financial Stability Act of 2010.  The first amendment sponsored by Senator Al Franken of Minnesota wants to create a credit rating agency board where it ?would select the credit rating agency for the issuer in the case of all initial ratings on structured finance products.?  John C. Coffee, Jr., D.C. Action Threatens Unintended Consequences, New York Law Journal, May 20, 2010.  The second amendment sponsored by Senator George S. LeMieux of Florida where it would require federal agencies such as the FDIC, the Comptroller of the Currency and the SEC to develop their own credit worthiness standard instead of relying on the rating agencies.

Professor Coffee suggests that ?public policy should focus on curbing conflicts of interest and not seek to downsize or eliminate credit rating agencies.?  For further information on the two amendments, please read the article in the New York Law Journal.  John C. Coffee, Jr., D.C. Action Threatens Unintended Consequences, New York Law Journal, May 20, 2010.

Bloggers, promote your law blog by nominating your blog for inclusion in USLaw.com's Law Blog Directory and RSS Reader. Benefits described.