April 29, 2010
The Honorable Bill Nelson
Washington, D.C. 20510
Dear Senator Nelson:
We are writing on behalf of the undersigned organizations to express our strong support for your amendment to strengthen the credit rating agency reform provisions of S. 3217. Your amendment would fix a key problem that contributed to the severity of the financial crisis by directing the Securities and Exchange Commission to adopt rules requiring credit rating agencies to monitor and update ratings as market conditions change. It would also give the agency authority to impose sanctions for violations of those rules.
As the recent investigation of the Permanent Subcommittee on Investigations makes clear, serious flaws in rating agency surveillance practices contributed to the crisis. Specifically, the investigation found that ratings agencies failed to devote adequate resources to post-rating surveillance even as they earned record profits. And they failed to retest ratings after their ratings models were changed, even when the rated securities contained the same types of assets and risks the models were changed to address. If the credit rating agencies had promptly retested existing securities as models changed and markets worsened, that action almost certainly would have resulted in earlier downgrades of subprime-based mortgage-backed securities. That, in turn, might have sent an earlier signal of problems in the market that could have helped to cool high-risk lending and lessened the shock to the market that resulted from the mass downgrades that occurred in 2007.
Your amendment fills an important gap in the Senate bill’s otherwise strong set of provisions to improve regulatory oversight of credit rating agencies. We are pleased to offer it our strong support.
Director of Investor Protection
Consumer Federation of America
Americans for Financial Reform