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Financial Reform Bill

Senate approves new rules for credit-rating agencies

John Dimsdale May 14, 2010
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Financial Reform Bill

Senate approves new rules for credit-rating agencies

John Dimsdale May 14, 2010
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The Senate has approved an amendment to its financial reform bill that would increase regulation of ratings agencies, which have been spotlighted for their close-knit relationships with top banks. The new rules would require the government to choose which agency rates each financial company, forbidding the financial institutions from being involved in the process as they once were. The supporters of the new regulation say it could open up the three biggest ratings agencies, Moody’s, Standard and Poor’s and Fitch Ratings, to more competitors. Barbara Matthews of BCM International Regulatory Analytics called the view optimistic, since rating agencies are expensive to start up and need a great deal of infrastructure and analytical talent to work effectively.

Though the move eliminates the conflict of interest between banks and ratings agencies, Matthews noted it could give people the impression that the government somehow sanctions or approves of the ratings. “Putting the government in the middle of deciding who gets to rate which company is overkill,” she said.

Dean Baker at the Center for Economic and Policy Research questioned whether the new rules were necessary. “Some could dispute how necessary they are given how bad they’ve been,” he said. “It’s almost as though we randomly ran around with all the issues and gave some investment grade and some junk and that didn’t correspond to anything in the world, it was somewhat random. I don’t know that that would be all that much worse than what’s actually happened.”

The bill could be approved by the Senate as early as next week.

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