Financial Overhaul Examines Credit Rating Agencies

As the Senate finishes up its financial regulatory bill, another key player in the economic meltdown is getting some scrutiny: credit rating agencies. They were giving favorable ratings to questionable financial products. Under new proposals, product issuers could no longer shop around for rating agencies — they would be assigned by the SEC.

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RENEE MONTAGNE, host:

When it comes to the financial overhaul bill in the Senate, banking giants and mortgage lenders have been the main focus of attention. Some major changes are also in store for another key player in the crisis: credit rating agencies.

NPR's Audie Cornish reports.

AUDIE CORNISH: Many federal banking laws require that rating agencies weigh in on the credit worthiness of financial products. Bonds, securities, even countries get credit ratings, signaling their ability to make good on debts. But during the financial crisis, agencies were giving triple-A ratings to bundled loan products that proved to be losers later.

Senator AL FRANKEN (Democrat, Minnesota): Now you don't have to be Adam Smith to guess what's happened here.

CORNISH: Democratic Senator Al Franken.

Sen. FRANKEN: The issuers, the buyers of credit ratings, shopped around for the ratings, and when they go to a credit rating agency and the credit rating agency didn't give them the rating they wanted, they wouldn't hire them the next time.

CORNISH: Franken won support for an amendment that would limit ability to shop around. Instead, a board within the Securities and Exchange Commission would randomly match a product with a credit rating agency.

Senator GEORGE LEMIEUX (Republican, Florida): But I would go further.

CORNISH: Republican Senator George LeMieux won an amendment that would phase out rules requiring financial companies to rely on these agencies.

Sen. LEMIEUX: Why should we reward them and allow them to continue to have what, in effect, is a government-sponsored monopoly?

CORNISH: Both lawmakers say their provisions will drive competition by making room for smaller agencies to get business, and they say they will give the industry some time to come up with alternatives to the credit ratings process.

Audie Cornish, NPR News, the Capitol.

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