White House to crack down on credit-rating agencies

After wielding the stick on abusive lending practices by card issuers in the US (See: Obama's pledge to curb sharp credit card practices gets bill moving in US Congress)  and cracking down on wealthy corporations that avoid tax by moving their money out of the country, (See: Obama to crack down on US corporates using tax havens) the US President is now planning to come down heavily on credit rating agencies.

The credit rating agencies (CRAs) in the US, have been criticised by many as one of the key players responsible for bringing the global economy down on its knees. The Obama administration wants to bring in a legislation in a bid to eradicate the conflict of interest between the CRAs and financial firms that they rate.

In its effort to rein in the $5 billion-a-year failed credit-rating industry, the Obama administration has proposed legislation that would require strong, consolidated supervision and regulation for all financial firms and provide a regulatory regime to monitor, mitigate, and respond to risks in the financial system, which will make it fairer for consumers and investors.

The much-needed crackdown on the CRAs, follows innumerous complaints by investors and lawmakers that the CRAs showed complete dishonesty, had conflict of interest and misjudgments, just prior to the onset of the global financial crisis, which led to over $1.5 trillion in write-downs and losses at the world's largest financial institutions, not to mentions the hundreds of institutions that went bankrupt, sending the global economy on a downward tailspin.

In the US, there are only five CRAs, which are recogonised by the Securities Exchange Commission (SEC), of which, the well-known are Standard and Poor's (S&P), Moody's Investors Service and Fitch Ratings. Standard and Poor's and Moody's control nearly 80 per cent of the market in US.

The three major CRA players and the most profitable, Standard & Poor's, Moody's and Fitch had come under attack by lawmakers last year for their collective failure in ranking subprime mortgage bonds, Lehman Brothers and AIG among many others.