A provision in the Senate finance bill would have prevented banks from shopping for favorable ratings for certain kinds of bonds.
The ratings agencies didn't like that.
Yesterday, Congress agreed to get rid of the provison, and replaced it with a plan to study the issue.
The provision, which was introduced by Sen. Al Franken, would have changed the way asset-backed securities — bundles of loans that are sliced up and sold to investors — are assigned to different ratings agencies.
Lots of asset-backed securities made up of mortgages got very high ratings during the housing boom, suggesting they were ultra-safe investments, then collapsed during the bust.
Under the current system, the banks that create the securities can shop around to find an agency that will give them the ratings they want. Because agencies are paid by banks for each rating, the agencies have a financial incentive to give the banks the ratings they want.
The Franken amendment aimed to eliminate this incentive by creating a board that would choose which agency rated each security.
Chris Dodd, one of the Congressional leaders who opposed the amendment agreed that there's a conflict of interest built into the ratings system. But he said the solution to the problem is unclear.
“Senator Franken raised a very interesting idea on how to do this,” Dodd said, according to the New York Times. “My concern is I don’t know how you work it. It’s complicated.”
The revised provision would allow the SEC to implement a board like the one Franken proposed, after a study is completed, the NYT says.