Projo Biz Blog

U.S. Sen. Jack Reed, D-RI, has circulated a draft bill that would open the door for investors to seek legal damages from credit-rating companies after the firms drew criticism for giving top grades to asset-backed debt.

Investors could sue companies including Moody's Investors Service and Standard & Poor's when the firms don't conduct "reasonable" examinations of banks' assurances of the debt before issuing a grade, according to a copy of the bill obtained by Bloomberg News. The companies would avoid litigation by doing the reviews, or by obtaining assessments from independent firms.

Credit-rating companies have come under fire after pension funds and other investors bought AAA-rated securities that were backed by mortgages on which delinquency rates soared. Reed, a Rhode Island Democrat, may be betting that the risk of legal costs will lead the companies to improve their accuracy, said Adam Pritchard, a law professor at the University of Michigan.

"It's trying to punish ratings agencies for having missed the subprime crisis," said Pritchard, a former U.S. Securities and Exchange Commission lawyer. Litigation "changes corporate behavior in situations where there is a cost-effective way of reducing the incidence of bad behavior."

 Tags  Providence RI U.S. Sen. Jack Reed

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