The US Senate passed a landmark WALL STREET REFORM BILL which includes a poison pill for credit rating companies in form of a liability provisionInvestors could bring private rights of action against rating agencies for a knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source.  Up to now credit rating agencies claim that their ratings are opinions and not investment recommendations or advice.  The implications will be more cautious ratings, perhaps even no ratings for certain entities, government and municipals or entire new industries which cannot come up with sufficient historical performance data.   

Editorial Comment:  Once this law passed by Congress other nations will follow suit.  They may not stop at credit ratings, and may also include other credit information services!

The Senate bill also includes an amendment to create an independent committee which would assign the task of rating asset-backed securities amongst all Nationally Recognized Statistical Rating Organizations (NRSROs); currently there are ten.  This would remove the ratings for asset-backed securities from the market, as issuers would no longer have a choice in picking a rating company. 

The EU Internal Market Commissioner Michel Barnier announced plans to put credit rating agencies under the thumb of an EU agency and to push for a European Rating Agency to rate sovereign debt, in the interest to increase competition in the market of credit ratings.  

Putting private enterprise under the ‘thumb’ of government is paradox.  Investors could be lulled into a false sense of security that ratings are now government sanctioned (worse yet guaranteed).  Others may say ratings may now be government influenced and thus worthless.  The EU wants its own rating agency because they blame the Anglo Saxon rating agencies for the Greek and Euro debacle.  It is questionable whether a European Rating Institution would do better in rating sovereign risk and it is doubtful whether such an institution would be free from government interference.

BIIA Newsletter June I – 2010 Issue