August 05, 2009
DODD ENCOURAGED BY PROGRESS ON REGULATORY REFORM
Banking Committee Holds Last Hearing before August Recess
Calls on Credit Rating Agencies to Provide Independent Research and In-Depth Analysis
WASHINGTON – Today the Senate Banking Committee held the last of an extensive series of hearings before the August recess. The Committee is expected to take up major legislation to modernize financial regulation sometime this fall.
The Committee has held an aggressive hearing schedule this year. “Virtually all of these have been to try and determine the best course for us to follow as we try and craft what may be the most important piece of legislation this committee will deal with or has dealt with in decades - the modernization of financial regulations,” Chairman Chris Dodd (D-CT) said.
“We now begin that process of trying to take those ideas and incorporate them into sound legislative proposals. Senator Shelby and I are determined to have this be a very inclusive process. All of our colleagues who are interested are invited to be at that table.”
“There will be points where we have disagreements I’m sure, but I think we will be in agreement far more than we will be in disagreement, and I find that very encouraging.”
Today’s hearing examined proposals to improve the regulation of credit rating agencies.
Dodd pointed out that a top rating agency advertises itself on its website as providing “independent credit ratings” and “risk evaluation” that are “authoritative,” “objective and credible.”
“Rating agencies market themselves as providers of independent research and in-depth credit analysis,” Dodd said. “But in this crisis, instead of helping people understand risk better, they hid risks throughout layers of complex structures. Instead of demonstrating independence, their ‘issuer-pays’ business model and consulting services to the investment banks that structured complex securities compromised their independence.”
Michael Barr, Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury testified at the hearing to examine proposals to enhance the regulation of Credit Rating Agencies.
Testimony and webcast will be available after the hearing at:
A complete list of hearings held this year can be found at:
Below is Dodd’s full statement as submitted for the record.
“Good morning, and welcome to our 25th hearing on regulatory modernization, our last hearing before the August recess. When we return, we’ll be getting to work on legislation that incorporates the many important lessons we’ve learned.
“A key theme of our work has been the lack of information and understanding about risks in our financial system. Today, we meet to examine companies that are supposed to help investors understand risk.
“Credit rating agencies are a key part of our financial system, and if you want proof of that, you need only look at the part they played in its failure.
“Rating agencies market themselves as providers of independent research and in-depth credit analysis. But in this crisis, instead of helping people understand risk better, they hid risks throughout layers of complex structures. Instead of demonstrating independence, their ‘issuer-pays’ business model and consulting services to the investment banks that structured complex securities compromised their independence.
“Bad methodology, weak oversight by regulators, conflicts of interest, and a total lack of transparency contributed to a system in which AAA ratings were awarded to complex, unsafe asset-backed securities.
“This broken system must be fixed.
“Municipalities in my home state of Connecticut and elsewhere need reliable ratings in order to raise funds to build schools and roads. When investors questioned the validity of ratings during the credit crunch, they pulled back from lending money to municipalities and other borrowers.
“Far from a seal of approval and safety, these ratings caused the markets to panic and contributed to the loss of millions of Americans’ life savings. It’s hard to blame investors who are hesitant to trust these ratings, or any part of our market, ever again.
“But rebuilding investor confidence is key to rebuilding our economy. This Committee is prepared to take action to reform the rating process. Senator Shelby has shown great leadership on this issue and was chairman when we passed a bi-partisan bill in 2006. Senator Reed has proposed a thoughtful bill. I look forward to hearing their views.
“Rating agencies need competent regulation and better information on which they base their ratings. They need to provide investors with clear information about their methodologies and performance.
“For too long, there has been no real penalty for publishing consistently erroneous ratings. That should be grounds for the SEC to revoke registration from credit rating agencies that consistently perform poorly.
“In fact, I believe we need a stronger regulator, with ample authority and qualified staff to deal with conflicts and abusive practices.
“Today, we will review a proposal from the Treasury Department and hear testimony from rating firms and experts. Previously, we have heard from representatives of various sectors of the financial industry. We will consider these perspectives as we move toward shaping our legislation this fall.
“We want to improve the competence and authority of rating agency regulators. We want rating agencies to be more transparent and responsible for their ratings. And we want investors to regain their confidence that they can trust in the information they receive.”
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