H.R. 3890 - Accountability and Accountability in Ratings Agencies Act is sponsored by Representative Paul Kanjorski (D-PA).
It's true that the ratings agencies have proven to be incredibly bad at providing accurate analyses of at least some types of securities. It's also true that the agencies are paid by the people that create the securities. This seems like an obvious conflict of interest right?
As I noted in my post Ratings Agencies Resconsidered, what is going on here may be far more intricate than this simple narrative, and thus far more difficult to legislate away:
Buyers of these securities were in need of places to invest their funds that also fit the regulatory criteria to which they were subject, so they were the ones to benefit from the grade inflation just as much, if not more so, than the sellers of the securities. Even in cases where one of the rating agencies provided the highest rating and another did not, buyers of these securities didn't seem to be troubled by the conflicting signals. They had their AAA and that is what they needed. If things went sour, they could point to that as some proof of their diligence in money management, and we can all see how well that strategy has worked.
This is not to say that acts of sloppiness and perhaps even fraud didn't occur at the ratings agencies; it would be more shocking if they didn't. Taking the time to think through where the incentives lie and who was in the position to inject some sanity into the market can help shed some much needed light on these problems.
This notion of the ratings agencies and the buyer's incentives, comes from an episode of EconTalk featuring Charles Calomiris of Columbia. You can listen to the podcast or read a transcipt at econtalk.org. The ratings agency discussion comes at about 54 minutes.
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