Credit rating agencies have it pretty good. By law, banks are required to use one of three agencies to rate financial products, so no amount of dismal performance (see the global financial meltdown caused by supposedly AAA-rated instruments) threatens to cost them customers.
An unusual alliance could see that governmental gift rescinded. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, says that a GOP plan to confront the credit rating agencies is something he can get behind.
The GOP has proposed ending the requirement that lenders use three specific agencies to rate financial products. With the requirement to use the agencies repealed, banks could elect not to have an instrument rated by one of the big three agencies. There are market pressures, of course, that would encourage the use of rating agencies, but under the reformed law, new agencies would be entitled to enter the marketplace. The free market, rather than a government mandate, would determine whether banks use rating agencies -- and which ones they use.
"In their plan, the one thing that I most agreed with was: repeal all the rules, all the statutory requirements that people use ratings agencies," says Frank. "That's something we sort of independently came together on."
No financial institution should be forced to do business with agencies that have performed so poorly, reasoned Frank. "They're pretty shaky people. And it's bad enough that they're shaky, then people are told, you've gotta go by them. But I think you will see, as part of our overhaul package, substantial rating agency reform," he said.
It's not a threat to gain leverage the overall reform package, he said, but a genuine policy goal. "It's inappropriate for us to be mandating that anyway. There should be some free market choices there," he says.
The House GOP loves to hear Frank sing the praises of the free-market system.
"Barney, every once in a while, he stumbles uncontrollably on to a good idea on financial regulation and that would be a good one," quipped Rep. Jeff Flake (R-Ariz.), a leading House conservative. (Flake added quickly that he's joking about Frank and that the chairman "certainly understands" the ins and outs of financial regulation.)
The agencies are currently characterized by the federal government as Nationally Recognized Statistical Ratings Organizations. The GOP plan would change the word "recognized" to "registered," allowing more agencies to enter the business. The plan would also end the requirement that banks use them and "removes all references to ratings throughout Federal law and regulation, so that the rating agencies will no longer operate as a government-sanctioned oligopoly."
A spokesman for House Minority Whip Eric Cantor (R-Va.), Brad Dayspring, welcomed Frank's allegiance. "For once, it is good to see Chairman Frank embracing free enterprise and recognizing that government is not the answer," he said.