WASHINGTON (CN) – Lawmakers passed two amendments to the financial reform bill Thursday aimed at reducing reliance on credit rating agencies.
One amendment, sponsored by Sens. George LeMieux, R-Fla., and Maria Cantwell, D-Wash., would remove the federal government’s endorsement of credit ratings agencies and force regulators to develop new standards of creditworthiness.
“The damage in the marketplace was done in large part because of our reliance upon these ratings agencies,” LeMieux said in a floor speech Thursday. “Why are we going to reward bad behavior?”
LeMieux criticized the market’s dependence on the three major credit agencies: Moody’s Investors Service, Standard & Poor’s and Fitch.
“My amendment writes these organizations out of law,” he said.
Credit ratings agencies are being blamed with contributing to the financial meltdown by inflating ratings on risky, mortgage-backed investments and slapping high quality AAA ratings on unworthy securities to rake in profits.
The LeMieux-Cantwell amendment eliminates credit ratings agencies from protections found in major financial laws such as the Securities Exchange Act and the Federal Deposit Insurance Act.
Cantwell said the bill would prevent federal regulators from relying on the “monopoly of the ratings agencies.” The amendment passed 61 to 38.
The other amendment would further diffuse the credit ratings agencies’ monopoly by instituting a method of randomly assigning agencies to rate securities or investments.
The bill, authored by Sen. Al Franken, D-Minn., would create an independent board overseen by the Securities and Exchange Commission that would assign the agencies to specific investments and deny banks the ability to shop around for favorable credit ratings.
“This conflict of interest has cost American investors and pensioners billions of dollars because supposedly risk free investments have failed and been downgraded to junk status,” Franken said in a floor speech Thursday. “My amendment will correct that conflict of interest. An issuer will no longer be able to shop around for a rating.”
Proponents argued that the measure would dilute the cozy relationship between ratings agencies and Wall Street banks and give smaller ratings agencies a chance to rate investments previously reserved for the leading agencies. The bill passed 64 to 35.