Neither the Senate Banking Committee bill that's being debated now nor the version that the House of Representatives passed last year would require credit-rating agencies to do any due diligence when they rate complex financial instruments.
It was the failure to verify the soundness of underlying loans that led to the global financial meltdown; complex mortgage-backed bonds with investment-grade ratings were sold worldwide, but later proved to be junk.
A McClatchy Newspapers investigation in October exposed how Moody's sacrificed the quality of its ratings in order to preserve a lucrative market share even as it knew of brewing problems in the housing market and what that might mean to the broader financial system.
Ratings agencies grade bonds on their risks of default. Until the September 2008 near-collapse of financial markets, their word was gold. However, the three leading agencies — Moody's Investors Service, Standard & Poor's and Fitch Ratings — downgraded to junk status billions of dollars' worth of mortgage-backed bonds that they'd given top ratings to earlier.
Beginning in 2007, those downgrades set a chain of events in motion that resulted in a freezing of global credit markets, the rescue and sale of investment giant Bear Stearns, the failure of investment bank Lehman Brothers and the $180 billion-plus taxpayer bailout of insurance titan American International Group. The financial crisis snowballed into an economic recession, and more than 8 million Americans have lost their jobs.
At the leading edge of this devastating chain of events was a collapse in underwriting standards. People who had previously been deemed not creditworthy received mortgages; for slightly higher interest rates, lenders didn't even verify borrowers' incomes or employment.
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