Near nationalisation for ratings agencies

Apologies for the sensationalist heading but this appears to be the intent of amendments passed in the US Senate to the Wall St Reform Bill, late on Thursday.

The first amendment, passed 64 votes to 35, calls for the establishment of a government clearing house to assign debt rating duties to the credit rating agencies. The intent of this amendment is to overcome the conflict of interest inherent in the business model of the CRAs.

This amendment reportedly applies only to credit ratings for structured debt products and not to corporate, government or other credit ratings. Nevertheless, allocation of such work to the CRAs, on whatever basis the allocation is made, will make the CRAs de facto arms of the government.

It is easy to imagine what this will do for the independence and quality of credit opinions. No doubt all ratings subsequently issued will be closely scrutinised.

The second amendment, passed 61 votes to 38, calls for Federal regulators, such as the FDIC, to develop their own standards of creditworthiness rather than rely on the CRAs. The requirement for regulators to develop their own standards appears to be aimed at reducing the prominence and importance of credit ratings.

It is likely that the amendment also recognises the deterioration in the quality of credit ratings that will result (at least for structured debt) from the first amendment. The ratings will be so bland and pasteurised as to be useless.  

This Bill has some way to go before it becomes law but the size of the vote in favour of these amendments makes it unlikely that they will be dropped. If this does become law in the US, Europe can be expected to follow.

Such an outcome may leave ASIC in an invidious position. Any attempt to do the same here may result in the departure of the CRAs completely, given their response to ASIC's licensing requirements.