Many blog readers have asked why there hasn’t been closer scrutiny of the role the rating agencies (Moody’s, Fitch and Standard & Poor’s) played in the financial meltdown. To which I’ve always said: Good question.
Now, it appears that Barney Frank — yes, the same Barney Frank whose risky approach to subsidized housing via Fannie Mae and Freddie Mac also contributed greatly to the crisis — may have pushed Congress to take a step to remedy the rating agencies problem. From The Wall Street Journal (requires subscription):
Leading the House negotiating team in a conference committee, Mr. Frank persuaded his Senate counterpart, Chris Dodd, to break the cartel of the credit-ratings agencies. These government-anointed judges of risk … put triple-A ratings on junk mortgage paper during the housing boom. When the boom turned to bust, the apparently safe assets were revealed to be anything but, with disastrous consequences for investors.
The results were so bad because government policies force many institutional investors to follow these ratings, no matter how flawed. Without this requirement, analysis from the Big Three would have to compete in the marketplace, and investors could decide whose judgments they trust on risk. Money-market fund managers would have to embrace the old-fashioned idea of due diligence.
Mr. Frank’s reform, strengthened further by an amendment from Rep. Scott Garrett (R., N.J.), will end the ratings racket enjoyed by S&P and the other “Nationally Recognized Statistical Ratings Organizations.” All requirements to use these favored credit judges will be stricken from federal rules as well as laws.
State legislators who haven’t already enacted such reform should do the same to ensure that the ratings cartel doesn’t maintain a grip on pension and insurance rules.
Say what you will about Congressman Frank’s role in protecting the failed mortgage giants Fannie Mae and Freddie Mac — and we’ve said a lot, little of it admiring — he is close to eliminating one of the root causes of the financial meltdown of 2008. Whatever one’s views on the existence of miracles, this one is close.
Let’s hope this part of the financial reform makes it through the rest of the legislative process unscathed.