Credit-rating agencies like Moody's and Standard & Poor's dodged a bullet on Tuesday as lawmakers decided to strip out a provision in the Wall Street reform bill that would have upended their business model.
Negotiators from the House of Representatives and Senate tasked with hammering out a final version of the sweeping reforms agreed to remove a measure that would have set up a new clearinghouse to eliminate perceived conflicts of interest in the ratings industry.
Instead, they ordered regulators to study the issue and take action only if they think it is necessary.
The credit-rating industry has been widely criticized for assigning overly rosy ratings to dubious debt offerings that brought Wall Street to its knees during the 2007-2009 financial crisis.
A hoax was perpetrated on the American public and the world public, Democratic Representative Paul Kanjorski said of inflated ratings.
Lawmakers said the need to drum up business gave the agencies an incentive to sweeten their ratings but they did not know whether the controversial proposal to separate buyers and sellers would work.
I kind of like the idea of the study, given the complexity of how you deal with conflicts of interest -- and they are significant, said Democratic Senator Christopher Dodd.
Shares of Moody's closed 6.6 percent higher and those of Standard & Poor's parent McGraw-Hill gained 5.7 percent as investors anticipated lawmakers would remove the provision opposed by large ratings firms.
LAW BY EARLY JULY?
Negotiators on the House-Senate committee aim to reconcile their reform bills to send a final version to President Barack Obama to sign into law by early July.
Both bills strive to avoid a repeat of the crisis that plunged the world economy into a deep recession and led to massive taxpayer bailouts of Wall Street firms.
Lawmakers plan to postpone the most contentious issues until the end of the process, which Democrats hope to wrap up on June 24.
Earlier on Tuesday, lawmakers agreed to subject private equity funds and hedge funds to greater oversight and permanently insure banking customers' deposit accounts up to $250,000. That limit, which had been raised during the crisis, was scheduled to revert to $100,000 in 2014.
Even as they worked through relatively noncontroversial aspects of the bill, Democrats were privately approaching consensus on one of the most contentious aspects -- a proposal to curb risky trading by banks.
But action on that measure was still days away as the panel focused on the fate of ratings agencies.
The Senate bill, passed last month, would have set up a new government clearinghouse to assign structured debt offerings to ratings agencies on a semi-random basis.
But House negotiators said more information was needed to figure out how to tackle the problem and their Senate counterparts agreed to take a step back.
The new provision directs the Securities and Exchange Commission to study the clearinghouse idea then set it up if regulators deem it the best way to eliminate conflicts of interest.
Democratic Senator Al Franken, who sponsored the original proposal, said the compromise means more time and study than I think is necessary but it also means definite action will be taken.
Ratings agencies are already likely to see their business costs rise as they deal with higher transparency and reporting standards, said Edward Atorino, analyst at The Benchmark Company in New York.
They also will face greater legal risk, as the final bill will likely make it easier for investors to sue agencies that issue misleading ratings, although House and Senate negotiators had yet to agree on the exact legal standard.
Representative Barney Frank, who heads the committee, said the final bill will knock the agencies down a peg by removing the requirement that government regulators use their ratings as they go about their work.
We did the best we could to put people on notice that they ought to be doing their own diligence, Frank said.
The Federal Reserve, the U.S. central bank, was poised to escape relatively unscathed after enduring more than a year of congressional criticism for its actions during the crisis.
House Democrats said they will try to strike out a Senate-approved measure that would make the head of the Fed's New York branch a political appointee, rather than one appointed by industry. The Fed has argued the Senate measure would compromise its independence.
The Fed also appeared likely to evade the most intrusive oversight as House lawmakers backed off from a plan that would have set up ongoing congressional audits that could have extended to monetary policy.
WORK ON DERIVATIVES
Behind the scenes, Democrats sought to resolve their most divisive issue -- how to regulate the $650 trillion derivatives market that led to the downfall of titans like insurer AIG during the crisis.
Banks looked increasingly likely to face some limits on swaps trading after Senate Agriculture Committee Chairman Blanche Lincoln softened a proposal that would require banks to spin off their lucrative swaps dealing desks.
Her new plan would require the Wall Street giants that dominate the swaps market to spin off dealing operations to a separately capitalized affiliate but would let them continue to use swaps to hedge their lending activities.
Sheila Bair, chairman of the Federal Deposit Insurance Corp, who had criticized Lincoln's original plan, told Reuters Insider she was encouraged by the new proposal.
Representative Collin Peterson, the House Agriculture Committee chairman, told Reuters it would probably become law in some form.
But lawmakers in the business-friendly New Democrat Coalition called for stripping Lincoln's plan, a central target for Wall Street lobbying efforts. Three members of the 69-member coalition are on the negotiating committee.
(Additional reporting by Rachelle Younglai, Kevin Drawbaugh and Charles Abbott in Washington and Elinor Comlay in New York; Editing by John O'Callaghan)