type: timeline_event
On September 29, 2006, President George W. Bush signed the Credit Rating Agency Reform Act (Public Law 109-291) into law, following its passage by unanimous consent in the Senate on September 22 and under suspension of rules in the House on September 27. The Act amended the Securities Exchange Act of 1934 to require nationally recognized statistical rating organizations (NRSROs) to register with the Securities and Exchange Commission and established SEC oversight of credit rating agencies. Proponents claimed it would improve ratings quality and foster accountability, transparency, and competition in the credit rating industry.
However, the Act fundamentally failed to address the core conflict of interest at the heart of rating agency failures: the "issuer-pays" model where agencies are paid by the very institutions whose securities they rate. The Act was enacted following concerns after the Enron and WorldCom bankruptcies exposed how agencies had rated their debt as investment grade until shortly before collapse. Yet by 2006, the three dominant agencies—Moody's, Standard & Poor's, and Fitch—were already deep into rating trillions of dollars of mortgage-backed securities and collateralized debt obligations with conflicts of interest running rampant.
Internal communications at rating agencies revealed awareness of the problems they were creating. One S&P analyst wrote in 2006: "Rating agencies continue to create an even bigger monster—the CDO market. Let's hope we are all wealthy and retired by the time this house of cards falters." The Justice Department later cited an S&P analyst who wrote in 2006 that the company had loosened its criteria for CDOs to create "a loophole big enough to drive a Mack truck through." Despite this legislation, 2006 saw explosive CDO issuance growth, with global issuance reaching $551.7 billion. By 2010, 73 percent of mortgage-backed securities Moody's had rated triple-A in 2006 were downgraded to junk. The Act's failure to address the fundamental business model that incentivized fraudulent ratings exemplifies captured regulation that provided the appearance of oversight while permitting industry practices that would trigger the 2008 financial crisis.