Schumer Proposes New Backup Rating System To Keep Conflict-Riddled Credit Rating Firms Honest

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Schumer Proposes New Backup Rating System To Keep Conflict-Riddled Credit Rating Firms Honest

At Senate Hearing, Schumer Floats Idea Of Having SEC Require Issuers To Pay For An Independent Second Rating To Either Validate Original Rating or Expose It As Flawed

Idea Could Prevent 'Ratings Shopping' By Issuers That Has Led To Widespread Rubber-Stamping Of Toxic Assets As Investment-Grade

U.S. Senator Charles E. Schumer (D-NY) today proposed establishing a new system to ensure the integrity of credit ratings by requiring a randomized selection of issuances to receive a second, independent rating from a different credit rating agency than the one initially hired by the issuer. Schumer said the Securities and Exchange Commission (SEC) could choose the agency to issue the backup rating, which would either validate the original rating or expose weaknesses in the methodologies used.

"This proposal would provide a check against ratings shopping and other conflicts of interest inherent in the system," Schumer said. "We need to restore confidence that a rating means what it says."

Schumer suggested the approach after months of reports emerged showing that the current ratings system leaves firms feeling beholden to the issuer that pays them. Schumer has pointed to the inherent conflicts posed by the issuer-paid model—and the compromised work of credit ratings firms that has ensued—as a major contributor to the current economic crisis.

Schumer said that under his proposal, a second rating could be required for every tenth issuance. The second, independent review would happen concurrently with the original one and the rating would come out at the same time. Schumer said the issuer would pay for the backup rating, but would not be able to choose the credit rating agency that provided it.

Schumer suggested his idea could be added to the Obama administration's larger proposal for regulating credit ratings agencies or in Rhode Island Senator Jack Reed's reform bill.

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