The Senate on Thursday approved a proposal to let regulators decide who rates asset-backed securities after investors said Standard & Poor’s and Moody’s Investors Service assigned inflated assessments to mortgage bonds because the companies were paid by Wall Street firms selling the debt.
The Senate approved an amendment to the financial overhaul legislation that would create a ratings board overseen by the SEC. The panel would assign a credit-rating company to rank an offering.
“There is a staggering conflict of interest affecting the credit-rating industry,” said Sen. Al Franken, D-Minn., who offered the amendment. “Issuers of securities are paying for the credit ratings. They shop around for their ratings.”
S&P said the Franken amendment would have unintended consequences.
“Credit-rating firms would have less incentive to compete with one another, pursue innovation and improve their models,” said Chris Atkins, a spokesman for S&P. “This could lead to a more homogenized rating opinion and, ultimately, deprive investors of valuable, differentiated opinions on credit risk.”
Spokesmen for Moody’s and Fitch didn’t immediately return phone calls seeking comment.