The Senate has passed a provision that would create a credit-rating board that would act as a middleman between bond issuers and ratings agencies. The SEC would establish and oversee the board, reports The Wall Street Journal.
Proponents of the amendment, which passed by a 64-35 with 10 Republicans crossing party lines to join 53 Democrats, say that it will promote accountability and transparency in the ratings process and will eliminate the inherent conflict of interest in the current ratings model (ratings agencies are paid by the very companies whose bonds they rate).
Detractors say that while accountability and transparency are worthy goals, the change could squash competition and creativity and could have unintended consequences.
It remains uncertain just how the law will be implemented and whether it will pass at all -- after all, "two powerful Democrats on the finance committee, Sen. Jack Reed and Chris Dodd, the committee chairman, opposed Franken's amendment," reports DealJournal.
So, just how will it work? An editorial in WSJ was blunt: "Congress's financial reform will make the regulatory system worse in hundreds of ways." The WSJ editorial supports a competing amendment that would do basically the opposite, moving the Government farther away from the ratings game by eliminating the special status that Moody's, Standard & Poor's and Fitch enjoy as Nationally Recognized Statistical Rating Organizations. This amendment seeks to create more market competition to let the organizations solve their own problems.
Write to Jeremy Greenfield