LeMieux-Cantwell Amendment Stops Over-Reliance on Credit Rating Agencies
WASHINGTON – U.S. Senators George LeMieux (R-FL) and Maria Cantwell (D-WA) today amended the Senate’s Financial Regulation bill to eliminate statutory protections for national credit ratings agencies and apply new standards of credit worthiness. The amendment, approved by the Senate 61 to 38, essentially removes the federal government's ‘seal of approval' from investment rating agencies. The effect will be to force federal regulators to develop more diverse and accurate measures of credit worthiness. Economists, regulators, and industry experts have agreed that an over-reliance on credit ratings contributed significantly to the recent economic crisis.
"There is a handful of federally-approved rating agencies that gave their top marks to some of the worst investments. Those stellar ratings made bad investments seem sound, up until when they crashed the markets," said LeMieux. "An investment rating should mean something, but today it doesn't. Removing their federal endorsement will end the dangerous over-reliance on these ratings and allow sound measures of risk to re-emerge in the marketplace-giving investors confidence an investment's true risk is known."
“Overreliance on credit agencies significantly contributed to the 2008 financial crisis,” Senator Cantwell said. “To prevent such a deep financial crisis from happening again, it is critical that federal regulators use their discretion to come up with appropriate standards of creditworthiness and not rely on the monopoly of the rating agencies. This legislation amends the comprehensive financial regulatory reform package currently being debated in the Senate to eliminate this reliance.”
“The damage done in the financial markets was due in large part because of our reliance on these rating agencies,” LeMieux said. “Let’s make sure that these rating agencies do not get rewarded for bad behavior. The federal government has allowed these few ordained agencies to have such a large pull in the market place. That needs to be changed to allow a more diverse and accurate approach to proving credit worthiness and further prevent future economic crisis.”
The LeMieux-Cantwell amendment also requires the U.S. Securities and Exchange Commission (SEC) to evaluate and make recommendations to Congress regarding how credit ratings can be standardized and better utilized as one of many tools for evaluating general investment risk.
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