Make us your home page

Q&A: Credit rating agencies and the financial overhaul bill

WASHINGTON — Before the financial crisis, surging home prices led investors to pour trillions into investments backed by mortgages. Investors felt confident because credit rating agencies had judged these investments to be safe.

They weren't. Safe ratings had gone to investments backed by some of the riskiest mortgages. When the agencies downgraded them by the billions, they helped trigger the financial crisis.

The financial overhaul bill before Congress aims, among other things, to hold these agencies accountable for sloppy analysis that produces inaccurate ratings. Yet it barely addresses the agencies' central conflict of interest: They're paid by institutions whose products they rate.

Here are some questions and answers about how rating agencies would be affected by the bill, which Congress is expected to approve:

How would the bill help make the agencies' ratings more accurate?

The agencies could be sued if they recklessly ignored an investment's risks in assigning a grade. It's impossible to sue them now because ratings are considered constitutionally protected free speech.

The agencies would face tighter regulation. A new office within the Securities and Exchange Commission would examine them every year and could fine them for breaking its rules. An agency's right to issue some kinds of ratings could be revoked if the agency's ratings too often proved inaccurate.

How would these rules affect financial institutions?

Banks will be discouraged from shopping around for an agency that will give them the highest rating. Banks and investment companies might sue agencies that issue inaccurate ratings.

Big investors, like pension funds and asset-management firms, will know more about how agencies assign ratings.

How would the changes affect ordinary people?

Pensions and mutual funds will have better information about where to invest their clients' money, supporters say. That could make them more stable and profitable. But if more investment companies choose to do their own research, mutual fund fees could rise.

Where does the bill fall short?

It fails to fix the conflict of interest at the heart of the credit raters' business model: They're paid by the same institutions whose investments they rate. Many lawmakers say agencies issued high ratings before the crisis because of pressure from banks and because the agencies wanted more of their business.

Congress failed to include in the final bill a proposal to randomly assign banks to credit rating agencies. That way, banks couldn't shop for an agency with lower standards. Instead, regulators will study the issue and decide what rules to issue.

Q&A: Credit rating agencies and the financial overhaul bill 06/28/10 [Last modified: Monday, June 28, 2010 9:05pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Associated Press.

Join the discussion: Click to view comments, add yours

  1. New stores coming to Tyrone Square Mall, like Bath & Body Works


    Tyrone Square Mall will welcome a half dozen new stores, like Bath & Body Works and MidiCi's The Neapolitan Pizza Company, this summer.

  2. Target Corp. reaches $18.5 million settlement with 47 states over data breach


    Target Corp. has agreed to pay Florida $928,963 out of a newly-announced $18.5 million settlement over a huge data breach that occurred in late 2013.

    Forty-seven states and the District of Columbia have reached an $18.5 million settlement with Target Corp. to resolve the states' probe into the discounter's massive pre-Christmas data breach in 2013. 
[Associated Press]
  3. Gov. Rick Scott's family history of alcohol abuse could decide 'liquor wall' bill


    TALLAHASSEE — Gov. Rick Scott must decide Wednesday whether to let Walmart and other big-box stores sell liquor, and he says a factor in his decision is the history of alcohol abuse in his family.

    Florida Governor Rick Scott is considering a veto of a bill that would allow Walmart, Target and other big box retail stores to sell liquor. [Andres Leiva | Tampa Bay Times]
  4. As St. Petersburg's Jabil Circuit broadens its business, it shrinks its name to Jabil


    St. Petersburg's Fortune 500 company, Jabil Circuit, informally tossed aside the "Circuit" in its name some time ago. That's because circuit board manufacturing, the company's core business for decades, has been squeezed out by a broader business agenda ranging from consumer packaging to supply chain management.

    Jabil Circuit informally dropped "Circuit" from its marketing material and signage, like at its St. Petersburg headquarters, years ago. Now it's official.
[Times file photo]
  5. Kahwa Coffee to open second drive-thru store in St. Petersburg


    Kahwa Coffee will open its 12th location and fourth with a drive-thru in a former "farm store" in St. Petersburg.

    Kahwa Coffee will open its 12th location and fourth with a drive-thru in a former "farm store" in St. Petersburg.
[Times file photo]