Support from Mississippi's Wicker for tough credit-rating rules proves pivotal
Sen. Al Franken did something that few senators these days manage to do: He gave a speech that changed a colleague's mind -- and with it, the direction of a controversial piece of legislation that even its biggest backers didn't believe had any chance of passage.
In an institution as sharply divided these days as the U.S. Senate, lawmakers typically follow the party line and rarely even listen to each other's speeches.
But Sen. Roger Wicker, R-Miss., had his ears open as Franken, D-Minn., recently described the purpose of his bill about credit raters and how it would work.
Shortly after Franken argued that his provision would have the effect of breaking up the cycle of credit-rating agencies providing inflated ratings to get repeat business, Wicker took to the Senate floor to offer his backing.
"I had not intended to speak tonight but having heard my friend the senator from Minnesota talk about problems with rating agencies I thought I would rise to say that in very many respects the senator from Minnesota is correct," said Wicker. "I hope we can strengthen the bill with regards to rating agencies."
With that, Franken had his first Republican co-sponsor on a measure that, if enacted into law, would fundamentally transform the way agencies rate complex structured finance products -- such as the mortgage securities at the center of the financial crisis.
After Wicker, Sen. Charles Grassley, R-Iowa, joined on. To the surprise of most in the consumer advocacy community, the measure passed on May 13, by a vote of 64 to 35, with the support of 10 Republicans.
The provision -- vigorously opposed by the big three credit rating agencies, Moody's Corp. (MCO 21.03, -0.43, -1.98% , Fitch Ratings and Standard & Poor's, a McGraw-Hill Cos. (MHP 28.95, -0.45, -1.53%) subsidiary -- would create a government clearinghouse intermediary through which credit raters would be assigned to handle structured finance products.
The measure would transform fundamentally how credit-rating agencies function when it comes to these products.
The goal, Franken argued, compellingly to Wicker and others, is to avoid conflicts pervading the current system in which an institution pays for its rating and, at times, can even "shop" for the best rating it can get for the lowest price.
Franken said the intermediary, which would take the form of a government credit rating agency board, would forestall the possibility of sweetheart deals.
The provision's imposition of such a government intermediary between raters and issuers of structured products would mark a major change in the relationship between the two groups -- so much so that even the measure's backers didn't believe it would ever have a chance of being approved.
A similar measure in the House died because Democratic leadership argued that it was too disruptive and would hurt chances of passage for the massive underlying bank-reform bill. And a measure offered for consideration late last year before the upper chamber, introduced by Sen. Charles Schumer, D-N.Y., failed to make the initial cut, for similar reasons.
One high-ranking Democratic consumer advocate of the Franken measure privately acknowledged what the consumer community had come to believe in the days leading up to the vote: "The measure didn't have a snowball's chance in hell of being approved."
The provision was opposed by only four Democrats -- including Senate Banking Committee chief Christopher Dodd, D-Conn, who said he believed in the principle of the measure. Privately, congressional staffers indicated that Dodd's opposition came, in part, because of his concerns about the measure's potential for bogging down the final bill and making it too full of controversial provisions that it would fail to pass the full Senate.
But without a House companion measure, it's unclear whether it will ultimately become law.
Specifically, the measure would have the Securities and Exchange Commission set up a Credit Rating Agency Board that would assign a credit rater for a structured finance security.
With the measure, an investment bank seeking a rating on a structured mortgage product would need to submit it to the credit board, which would decide which rating agency would do the rating.
A majority of the board would be made up of institutional and other investors, but it would also include a banker and rater. The group would randomly assign a credit rater for each security but would take into account the capacity of smaller agencies to handle the influx of mortgage securities by limiting how many products would be sent to these institutions to be reviewed.
Yet, many questions remain, such as what happens when a bank refuses to pay for the rating provided to its security by the assigned rater. Backers say the investor majority on the government board would have an incentive -- and would be instructed -- to make sure the ratings are accurate and the fees reasonable.
Still, in putting such an untested system into practice, unintended consequences would inevitably arise.
awwwwwwwww bipartisanship makes me feel all warm and fuzzy :D