An amendment to remove conflicts of interest from credit rating by banks won bipartisan U.S. Senate support Thursday and will be included in Wall Street reform efforts.
The proposal, authored by Sen. Al Franken, DFL-Minn., establishes a Credit Rating Agency Board that would determine which credit rating agency would give a financial institution the rating for their bond.
"Today is a major victory for Main Streets all over America," Franken said Thursday about the 64-35 vote.. "We're cleaning up Wall Street's dishonest system and replacing it with one that rewards accuracy instead of fraud. My proposal wasn't conservative, or liberal, or even moderate. It was just plain common sense. That's why I had the support of colleagues on both sides of the aisle and why we were able to win today."
Co-sponsors include Republican Sens. Roger Wicker of Mississippi and Charles Grassley of Iowa. Also on the bill are Sens. Charles Schumer, D-N.Y., and Bill Nelson, D-Fla.
Currently, financial institutions can pick whatever credit rating agency they want, leaving them open to conflict of interest charges. Setting up a board to make those assignments is similar to rotating what judge prosecutors appear before, said Franken spokeswoman Jess McIntosh.
"The bonds provide retirement security, and now people in Bemidji will know what their investment is worth," McIntosh said. Franken's amendment "limits the process of investment banks shopping for the best rating -- and rating agencies giving out undeserved Triple A's to attract business."
There are incentives, she added, for credit rating agencies which are the most accurate.
Called the Restore Integrity to Credit Ratings Act, the amendment would put the new board under the Securities and Exchange Commission and would consist of a majority of investors, a representative from the issuer industry and credit rating agency industry and an impendent member.
"So it ends the current conflicts, and has the added benefit of throwing the door open to competition from smaller rating agencies that don't have the ability to pay to play under the current system (where the top three agencies abuse their exclusive power)," McIntosh said.
Franken's spokeswoman said the amendment is one of the strongest reforms in the Wall Street reform bill, and gives the freshman senator the second bill that he's added tough programs. The other, the health care reform bill, accepted a Franken amendment to require insurance companies to spend more on health care services than marketing campaigns and CEO salaries.
"Credit rating agencies were one of the main culprits in the financial crisis," said Schumer in a statement. "They adopted questionable practices intended to win over clients, neglected their own internal controls and developed a coziness with clients. Under this measure, issuers will no longer be able to choose a rating agency and directly influence what kind of ratings they can get."
"The credit-rating agencies are supposed to be independent evaluators of financial companies, but overly cozy relationships with those who they're supposed to scrutinize have interfered. This conflict-of-interest amendment is an important reform to help bring about the independent assessment investors deserve. It's a matter of market integrity," Grassley said.
Franken's attention now shifts to another amendment which McIntosh said should come up for a vote soon. It establishes on Office of Homeowner Advocate to deal with homeowners struggling to keep their homes. The homeowner advocate would help people fix the mistakes currently denying them eligibility to the Home Affordability Modification Program.
"Right now, Minnesotans fighting foreclosure have nowhere to turn when their servicers treat them unfairly, break the rules, lose their paperwork, etc.," McIntosh said. "Franken's amendment would create an Office of Homeowner Advocate -- funded from existing sources -- whose sole focus would be assisting these folks when they need it."
With Sen. Olympia Snowe, R-Maine, joining the bill, the effort is bipartisan, she said.