February 04, 2015
The Washington Post might have misled readers with its discussion of efforts to end the conflict of interest inherent in the current system where banks issuing mortgage backed securities hire the agencies that rate their debt. It told readers:
“Congress debated that idea when it put together the sweeping financial overhaul law in response to the 2008 crisis. But lawmakers pushing the idea were unable to include it into the final legislation.”
The Senate actually overwhelmingly approved (65 votes) an amendment from Senator Al Franken that would have had the Securities and Exchange Commission pick the rating agency assigned to assess newly issued debt. The provision was stripped out in the conference committee, apparently with the support of then Secretary of the Treasury, Timothy Geithner.
The main substantive argument against the Franken amendment was that the SEC may send over an auditor who was not qualified to rate a new issue. This raises the obvious question of why an investment bank would be trying to market a bond issue that a professional auditor at a major credit rating agency could not understand.
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