Skip to main content

SEC must ride herd on credit rating agencies

By Al Franken and Roger Wicker, Special to CNN
updated 7:57 AM EDT, Fri May 17, 2013
A trader works the S&P 500 Futures pit in the Chicago Mercantile Exchange.
A trader works the S&P 500 Futures pit in the Chicago Mercantile Exchange.
STORY HIGHLIGHTS
  • Franken, Wicker: Justice Dept. sued S&P for fraud in AAA ratings ahead of financial crisis
  • They say ratings agencies got rich, taxpayers paid price, crisis touched off call for reforms
  • They say SEC's new study on ratings system shows conflict of interests led to financial crisis
  • Senators: New SEC chair, May Jo White, has ties to industry, must prove she'll enact reforms

Editor's note: Al Franken, a Democrat, is a U.S. senator from Minnesota. Roger Wicker, a Republican, is a U.S. senator from Mississippi.

(CNN) -- Earlier this year, the Justice Department filed a $5 billion lawsuit against Standard & Poor's -- one of the nation's Big Three credit rating agencies, which also include Moody's and Fitch.

The lawsuit accuses S&P of knowingly giving AAA ratings to financial products the agency's analysts understood to be unworthy.

Handing out sparkling ratings to deeply flawed securities represents a serious breach of trust on the part of a credit rating agency. But it was common practice for the Big Three. And in no small way, this practice enabled the financial meltdown of 2008.

Al Franken
Al Franken
Roger Wicker
Roger Wicker

Under the current so-called "issuer pays" model, agencies are paid by the Wall Street firms whose products they are rating. The agencies thus have a financial motive to satisfy issuers with a high rating: If an agency declines to give a particular product its seal of approval, the issuer can simply take its business -- and its fees -- elsewhere.

In the lead-up to the financial crisis, the Big Three gave out AAA ratings to subprime mortgage-backed securities. The securities, of course, turned out to be toxic, but the agencies were paid anyway.

What's worse, when Wall Street ran out of questionable mortgages to securitize, it created a whole new market based on bets on those securities, bets called "derivatives." The Big Three kept on handing out AAA ratings to these complicated new products, and were again paid handsomely to do so.

The rating agencies made hundreds of millions of dollars, but in the end, it was American taxpayers who paid the price -- losing their savings, their homes and their jobs in addition to having to pay billions to bail out banks.

In the wake of that catastrophe, there is bipartisan agreement that the credit ratings process needs serious reform. That is why we worked together on an amendment to the Dodd-Frank financial reform law -- and why the Franken-Wicker provision passed with bipartisan support.

Sen. Franken wants to grade Wall Street

Our amendment was designed to bring accountability and transparency to the ratings process. In short, we want to replace pay-for-play with pay-for-performance, opening up the ratings process and establishing a competitive marketplace that rewards accuracy.

The final version of Dodd-Frank required that the Securities and Exchange Commission complete a study of the ratings system before acting. Nearly three years later, that study is complete, finding that "inherent" conflicts of interest in the system contributed to the 2008 crisis. At our urging, the SEC held a roundtable earlier this week to discuss moving forward.

During the open comment period on its report, the SEC received just 32 letters on the issue -- six of them coming from rating agencies. We are pleased that the roundtable sought greater public engagement, including input from the investors and consumer advocates. But now comes the real test of whether the SEC is truly committed to preventing another recession.

Ultimately, the decision to move forward will be led by its new chair, Mary Jo White. White's close ties to the financial industry -- she was a defense attorney for many of Wall Street's biggest players -- have rightly raised concerns about her ability to police it. Her defenders argue that, as a former prosecutor who's taken on gangsters and terrorists, White won't be bullied into going easy on bad actors in our financial sector.

But it's up to White to prove that she's up to the task. And how aggressively she takes on the credit rating industry after the roundtable is the first key test to demonstrate that her Wall Street background won't impede her ability to be the watchdog we need. It will also be a test of how serious the Obama administration is about preventing another financial meltdown. Make no mistake: we will be watching closely that, under her leadership, the SEC will implement credible reform.

A responsible credit rating industry is critical to protecting the public interest -- and there is bipartisan support for reform that restores accountability, transparency and integrity to the system. This week's roundtable was a step forward. We hope that the new SEC head will follow through on the reform that, as we learned the hard way in 2008, is long overdue.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Al Franken and Roger Wicker.

ADVERTISEMENT
Part of complete coverage on
updated 12:42 PM EDT, Wed April 16, 2014
Rick McGahey says Rep. Paul Ryan is signaling his presidential ambitions by appealing to hard core Republican values
updated 11:39 AM EDT, Wed April 16, 2014
Paul Saffo says current Google Glasses are doomed to become eBay collectibles, but they are only the leading edge of a surge in wearable tech that will change our lives
updated 2:49 PM EDT, Tue April 15, 2014
Kathleen Blee says the KKK and white power or neo-Nazi groups give haters the purpose and urgency to use violence.
updated 7:56 AM EDT, Wed April 16, 2014
Sen. Sheldon Whitehouse and Rep. Henry Waxman say read deep, and you'll see the federal Keystone pipeline report spells out the pipeline is bad news
updated 7:53 AM EDT, Wed April 16, 2014
Frida Ghitis says President Obama needs to stop making empty threats against Russia and consider other options
updated 5:29 PM EDT, Tue April 15, 2014
Peter Bergen and David Sterman say the Kansas Jewish Center killings are part of a string of lethal violence in the U.S. that outstrips al Qaeda-influenced attacks. Why don't we pay more attention?
updated 12:41 PM EDT, Tue April 15, 2014
Danny Cevallos says families of the passengers on Malaysian Airlines Flight 370 need legal counsel
updated 11:23 AM EDT, Mon April 14, 2014
David Frum says Russia is on a rampage of mischief while Western leaders and Western alliances charged with keeping the peace hem and haw
updated 7:56 AM EDT, Mon April 14, 2014
Most adults make the mistakes of hitting the snooze button and of checking emails first thing in the morning, writes Mel Robbins
updated 1:54 PM EDT, Mon April 14, 2014
David Wheeler says as middle-class careers continue to disappear, we need a monthly cash payment to everyone
updated 7:55 AM EDT, Mon April 14, 2014
Democrats need to show more political spine when it comes to the issue of taxes.
updated 11:55 AM EDT, Mon April 14, 2014
Donna Brazile recalls the 50th Anniversary of the Civil Rights Act as four presidents honored the heroes of the movement and Lyndon Johnson, who signed the law
updated 9:17 AM EDT, Mon April 14, 2014
Elmer Smith remembers Chuck Stone, the legendary journalist from Philadelphia who was known as a thorn in the side of police and an advocate for the little guy
updated 2:56 PM EDT, Sun April 13, 2014
Al Franken says Comcast, the nation's largest cable provider, wants to acquire Time Warner Cable, the nation's second-largest cable provider. Should we be concerned?
updated 11:22 AM EDT, Fri April 11, 2014
Philip Cook and Kristin Goss says the Pennsylvania stabbing attack, which caused grave injury -- but not death, carries a lesson on guns for policymakers
updated 3:06 PM EDT, Fri April 11, 2014
Wikipedia lists 105 football movies, but all too many of them are forgettable, writes Mike Downey
updated 10:32 AM EDT, Fri April 11, 2014
John Sutter and hundreds of iReporters set out to run marathons after the bombings -- and learned a lot about the culture of running
updated 12:49 PM EDT, Fri April 11, 2014
Timothy Stanley says it was cowardly to withdraw the offer of an honorary degree to Ayaan Hirsi Ali. The university should have done its homework on her narrow views and not made the offer
updated 10:16 AM EDT, Fri April 11, 2014
Al Awlaki
Almost three years after his death in a 2011 CIA drone strike in Yemen, Anwar al-Awlaki continues to inspire violent jihadist extremists in the U.S, writes Peter Bergen
updated 9:21 PM EDT, Fri April 11, 2014
David Bianculli says Colbert is a smart, funny interviewer, but ditching his blowhard persona to take over the mainstream late-night role may cost him fans
updated 1:31 PM EDT, Thu April 10, 2014
Rep. Paul Ryan says the Republican budget places its trust in the people, not in Washington
updated 5:28 PM EDT, Thu April 10, 2014
Aaron David Miller says Obama isn't to blame for Kerry's lack of progress in resolving Mideast talks
updated 11:22 AM EDT, Mon April 14, 2014
David Weinberger says beyond focusing on the horrors of the attack a year ago, it's worth remembering the lessons it taught about strength, the dangers of idle speculation and Boston's solidarity
updated 12:32 PM EDT, Thu April 10, 2014
Katherine Newman says the motive for the school stabbing attack in Pennsylvania is not yet known, but research on such rampages turns up similarities in suspects and circumstances
updated 7:03 AM EDT, Fri April 11, 2014
Simon Tisdall: Has John Kerry's recent track record left Russia's wily leader ever more convinced of U.S. weakness?
updated 12:40 PM EDT, Thu April 10, 2014
Mel Robbins says Nate Scimio deserves credit for acting bravely in a frightening attack and shouldn't be criticized for posting a selfie afterward
updated 2:39 PM EDT, Wed April 9, 2014
Wendy Townsend says the Rattlesnake Roundup -- where thousands of pounds of snakes are killed and tormented -- is barbaric
updated 9:45 AM EDT, Thu April 10, 2014
Dr. Mary Mulcahy says doctors who tell their patients the truth risk getting bad ratings from them
updated 9:28 AM EDT, Wed April 9, 2014
Peggy Drexler says the married Rep. McAllister, caught on video making out with a staffer, won't get a pass from voters who elected him as a Christian conservative with family values
updated 7:43 AM EDT, Wed April 9, 2014
David Frum says the president has failed to react strongly to crises in Iran, Syria, Ukraine and Venezuela, encouraging others to act out
updated 4:57 PM EDT, Wed April 9, 2014
Eric Liu says Paul Ryan gets it very wrong: The U.S.'s problem is not a culture of poverty, it is a culture of wealth that is destroying the American value linking work and reward
updated 7:51 AM EDT, Wed April 9, 2014
Frida Ghitis writes: "We are still seeing the world mostly through men's eyes. We are still hearing it explained to us mostly by men."
updated 10:08 AM EDT, Thu April 10, 2014
Chester Wisniewski says the Heartbleed bug shows how we're all tangled together, relying on each other for Internet security
updated 3:26 PM EDT, Wed April 9, 2014
Danny Cevallos says an Ohio school that suspended a little kid for pointing his finger at another kid and pretending to shoot shows the growth in "zero tolerance" policies at school run amok
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT