Posts Tagged ‘conflict of interest’

Franken Amendment Regarding Credit Rating Agencies Passes 64-35

An important amendment that makes the current financial reform bill winding its way through Congress stronger has been passed by a vote of 64-35. Introduced by Senator Franken of Minnesota, this amendment would create a clearing house through which all credit agencies, such as Fitch Ratings, Standard & Poors, and Moody’s would be assigned to rate debt instruments.

Currently, securities firms may choose which agency to use based on the ratings the agency gives the bonds they wish to sell. This ability to shop around for the highest ratings constitutes a major conflict of interest since it incentivizes the rating agencies to inflate their ratings in order to compete for more business. This systemic conflict of interest played a major role in the financial collapse that we are still crawling out from under.

What the Franken amendment does is to put an non-biased, intermediary agency in between the securities brokers and the credit rating agencies.  Since this intermediary agency would assign out work to the credit rating agencies on a random basis, the incentive to rate a security higher in order to get more business would be gone.

Way to go, Senator Franken and Congress!

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