Credit rating agency bill backed by US House panel

By Reuters Staff
October 29, 2009

By Kevin Drawbaugh
WASHINGTON, Oct 28 (Reuters) – Credit rating agencies, which have been widely blamed for failing to spot problems that helped trigger the global financial crisis, would be more tightly regulated under legislation approved on Wednesday by the U.S. House of Representatives Financial Services Committee.

The committee, in another step forward for the Obama administration’s push for financial reform, voted 49-14 to send the bill to the full House for a vote, likely next month.

Firms affected by the bill include Moody’s Corp, Standard & Poor’s <MHP.N> and Fitch Ratings.

The bill would for the first time create a Securities and Exchange Commission office to oversee the agencies, their ratings and how they are set.

It would also open the door to more lawsuits by investors against agencies over flawed ratings, a provision opposed by the agencies and likely to attract controversy as the bill works its way to the House floor and the Senate.

“The rating agencies really screwed up and now people are asking for us to put their heads in the guillotine. … But what really needs to happen is to see what can be done to make sure this doesn’t happen again,” said Representative Paul Kanjorski, author of the committee’s bill.

The rating agencies have been widely blamed for failing to spot credit market problems with securitized debt and other instruments that played key roles in triggering the global financial crisis that began in 2007.

President Barack Obama and Democrats have been working for months on a package of proposals to tighten bank and capital market regulation after the crisis, the worst in decades.

While the outlook for financial reform in the Senate was cloudy, the House Financial Services Committee has been making steady progress on handling reform proposals, with the credit rating agency measure winning bipartisan support.

In another matter, the committee debated, but did not vote, on a bill to beef up the SEC and bolster assorted investor protection standards.

The wide-ranging bill was amended to require financial advisers to municipalities to register with the SEC, which would bring more scrutiny to the municipal bond market. A vote on the overall bill was postponed until Tuesday.

“LOOPHOLES” TARGETED
Critics view the credit agencies as compromised by their prevailing business model, in which issuers of debt pay the agencies for debt ratings. Kanjorski said lawmakers explored ways to change that model, but found it was impractical.

Instead, the bill imposes regulations on the industry intended to “close many of the weaknesses and the loopholes,” said Kanjorski, a Democrat.

The bill also calls for removing some references in federal law that mandate certified agencies’ credit ratings, as a way to reduce the pervasiveness of their use.

Financial Services Committee Chairman Barney Frank will hold a hearing on Thursday to take testimony from Treasury Secretary Timothy Geithner and other top regulators on the administration’s proposal, released on Tuesday, for dealing with systemic financial risk and financial giants that have come to be viewed by markets as “too big to fail.”

Other witnesses at the hearing will be Federal Deposit Insurance Corp Chairman Sheila Bair, Comptroller of the Currency John Dugan, Federal Reserve Governor Daniel Tarullo, and Office of Thrift Supervision Acting Director John Bowman.

The new bill calls for abolishing Bowman’s agency.

The committee has scheduled a hearing for Friday on a bill that would require banks to get a consumer’s permission before charging overdraft fees, and cap the number of overdrafts that banks can charge consumers who do opt-in to six overdraft fees per year.

The committee plans four days of working sessions next week beginning on Tuesday. In addition to the investor protection bill, the working agenda will include the systemic risk bill and possibly the overdraft protection bill, Frank said.

(Additional reporting by Rachelle Younglai; Editing by Leslie Adler) ((kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, fax +1 202 488 3459))
Wednesday, 28 October 2009 17:52:51RTRS [nN28301118] {C}ENDS

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