Congressman Ellison Introduces Credit Rating Agency Reform Bill
Congressman Keith Ellison
Washington, D.C. – Congressman Keith Ellison (D-MN) will introduce important legislation today to strengthen the regulation of credit rating agencies in anticipation of upcoming Congressional action on comprehensive financial regulatory reform. Rating agencies are currently subject only to limited oversight by the Securities and Exchange Commission (SEC).
“Although credit rating agencies are given some regulatory status by practice, the oversight to which they are subjected is wholly inadequate,” Ellison stated. “When these agencies put their mark of approval on complex products they confer a legitimacy that may not actually exist. We’ve learned of instances where credit rating agencies have given top ratings to products backed by dubious mortgages and other loans. Under current law there was really no one looking over the agencies’ shoulders to make sure that they were making reasonable assumptions or had even a basic understanding of the risks they were assessing,” Ellison indicated.
Credit rating agencies are critical elements of our financial system. They rate and analyze a wide array of credit products, everything from corporate and municipal bonds to complex structured products like collateralized debt obligations (CDOs). Investors rely upon the ratings and analysis of credit rating agencies as a basis for their investment decisions, while regulators use ratings as a means of assessing the quality of bank assets and the adequacy of bank capital.
The Ellison legislation would help address the lack of oversight by giving the Federal Reserve authority over the credit rating agencies when they analyze and rate structured financial products. This authority would build upon powers that the Federal Reserve has already assumed as part of its administration of the Term Asset-Backed Securities Loan Facility (TALF) program. In response to a Congressional letter (from Congressman Ellison, House Financial Services Committee Chairman Frank and several other Members of Congress) on the TALF program, the Federal Reserve indicated that it: “ha[s] carefully reviewed the methodologies that the rating agencies are employing to analyze the types of [asset backed securities (ABS)] that are eligible to be financed in the TALF program.” This legislation would extend these oversight powers to all ABS, not just those financed through TALF.
“Credit rating agencies are a weak link in the chain. Subjecting them to enhanced supervision by a regulator with relevant expertise when they rate products that vary from their traditional business of rating corporate bonds provides a sensible guard rail for our financial system,” Ellison concluded.