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Senate Amends Financial Overhaul Bill

In the latest sign of the zeal in Congress to get tough on Wall Street, the Senate approved two initiatives on Thursday aimed at addressing the role that major credit rating agencies played in the 2008 financial collapse, including a proposal to end the reliance on companies like Moody’s Investors Service and Standard & Poor’s.

And, in a step that could cut deeply into a huge and easy revenue source for major banks, the Senate also approved a proposal that would direct the Federal Reserve to impose new limits on the fees that banks can charge businesses to process transactions using credit and debit cards. Banks collected about $50 billion in such fees last year.

The initiatives were adopted as amendments to the sweeping financial regulatory legislation that Senate Democratic leaders hope to complete next week.

Senator Al Franken (D-MN)
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Senator Al Franken (D-MN)

The plan to limit card fees, championed by Senator Richard J. Durbin, Democrat of Illinois, offered a particularly pointed example of how unfriendly the atmosphere on Capitol Hill has become for banks and their lobbyists this year.

In some cases, lawmakers are trying to outdo each other in terms of whose proposals are tougher on the entrenched Wall Street interests.

One measure approved Thursday, sponsored by Senators George LeMieux, Republican of Florida and Maria Cantwell, Democrat of Washington, would remove references to the credit agencies in major financial services laws, including the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Federal Deposit Insurance Act.

The proposal, which is intended to spur the government to find alternative rating methods, was approved by a vote of 61 to 38, with all 41 Republicans in favor and 37 Democrats and one independent opposed.

“We know that one of the main reasons why we had our financial debacle in 2008 was that credit agencies failed to do their jobs,” Mr. LeMieux said on the floor. “They put AAA stamps of approval on products that deserve no such stamp.”

“My amendment writes these organizations out of law,” Mr. LeMieux continued. “In a way, we’re looking here and saying the astrology that we relied upon in the past didn’t work. Let’s have some new and better astrology.”

Ms. Cantwell said, “It’s critical that these agencies like the F.D.I.C. and the Comptroller of the Currency come up with appropriate standards of creditworthiness and not rely on the monopoly of the rating agencies.”

The proposal by Mr. LeMieux and Ms. Cantwell is similar to language in the version of the financial regulatory legislation adopted by the House late last year.

And it would go further in clamping down on the rating agencies than another amendment, from Senator Al Franken, Democrat of Minnesota, that aims to prevent conflicts of interest by randomly assigning ratings agencies to provide initial assessments.

Mr. Franken’s proposal was approved by a vote of 64 to 35.

Mr. Franken’s measure would create a board, overseen by the Securities and Exchange Commission, that would make the assignments. Mr. Franken said his proposal would eliminate conflicts of interest and also allow smaller rating companies to compete against the major players.

“There is a staggering conflict of interest affecting the credit rating issue,” Mr. Franken said in a speech. “The way it works now, issuers of securities are paying for their credit ratings. They shop around for their ratings, selecting those agencies that tend to offer them the best ratings and threatening to stay away from rating agencies that are too tough on them.”

He added, “My amendment would call issuers to a credit rating agency that will give them their first rating on complex financial products. They would be assigned. That means an issuer will no longer be able to shop around for a rating.”

Senator Christopher J. Dodd, Democrat of Connecticut and the primary author of the regulatory legislation, opposed both proposals on rating agencies.

In a statement, Standard & Poor’s said that Mr. Franken’s amendment could result in “unintended consequences.”

“Credit rating firms would have less incentive to compete with one another,” the company said. “This could lead to more homogenized rating opinions and, ultimately, deprive investors of valuable, differentiated opinions on credit risk.”

Moody’s, in another statement, said that it “supports the goals of enhancing the transparency and accountability of the ratings process, and we are hopeful that the final legislation will achieve these goals while avoiding unintended consequences for market participants.”

Because the two Senate amendments seem to conflict, lawmakers said, adjustments would have to be made when the bill was reconciled with the House version.

The amendment by Mr. Durbin would direct the Federal Reserve to set limits so that fees charged for credit and debit card transactions were “reasonable and proportional” to the cost of processing the charges.

It is unclear how much that would cut into the revenue of card issuers. The measure includes exemptions for all but the largest banks.

In a floor speech, Mr. Durbin said his amendment would protect businesses now paying 1 to 3 percent on credit or debit transactions. “I urge my colleagues, if they are listening to small businesses across America trying to survive, trying to add new employees, give them a helping hand,” he said.

Edward Wyatt contributed reporting.

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