ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura.

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Breaking News: Proposed Bill Would Prohibit Rating Agencies from Consulting to Firms They Rate

07/20/2009 10:48 AM

The following Reuters story describes a proposed bill that would dramatically restructure the rating agency business in a manner similar to the changes of a few years ago in the accounting profession. We reproduce the story in this blog.

U.S. releases new credit rating rules to curb power

Tue Jul 21, 2009 1:24pm EDT

WASHINGTON (Reuters) – The U.S. Treasury Department said on Tuesday it hopes new disclosure and conflict of interest rules will curb the power of credit rating agencies that have been blamed for fueling the recent financial crisis.

The Treasury sent an 18-page draft bill to Congress that would prevent credit rating agencies from consulting for the companies they are responsible for evaluating.

Shares of Moody’s and McGraw Hill, parent of Standard & Poor’s, extended losses after the announcement.

The Securities and Exchange Commission would have new powers to regulate the industry and companies would have to disclose when they go “ratings shopping” in two other provisions of the plan.

“In recent years, investors were overly reliant on credit rating agencies that often failed to accurately describe the risk of rated products,” the Treasury said in a statement.

The reform is meant to help reduce reliance on credit rating companies, the government said.

Still, the plan does not tinker with the basic business model that has ratings agencies relying on fees from the companies that they evaluate.

“Credit ratings agencies will face similar restrictions to other professional services providers, like accountants, and will be prohibited from providing consulting services to companies companies that contract for ratings,” the Treasury said in a statement.

(Reporting by Patrick Rucker; Editing by James Dalgleish)

ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura.

Read More