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 6:10 PM EST, Mon November 24, 2014
If Obama thinks pushing out Hagel will be seen as the housecleaning many have eyed for his national security process, he'll be disappointed, says David Rothkopf.
updated 8:11 AM EST, Tue November 25, 2014
The decision by the St. Louis County prosecuting attorney to announce the Ferguson grand jury decision at night was dangerous, says Jeff Toobin.
updated 3:57 AM EST, Tue November 25, 2014
China's influence in Latin America is nothing new. Beijing has a voracious appetite for natural resources and deep pockets, says Frida Ghitis.
updated 4:51 PM EST, Mon November 24, 2014
Iranian President Hassan Rouhani speaks during a press conference in the capital Tehran on June 14, 2014.
The decision to extend the deadline for talks over Iran's nuclear program doesn't change Tehran's dubious history on the issue, writes Michael Rubin.
updated 2:25 PM EST, Fri November 21, 2014
Maria Cardona says Republicans should appreciate President Obama's executive action on immigration.
updated 7:44 AM EST, Fri November 21, 2014
Van Jones says the Hunger Games is a more sweeping critique of wealth inequality than Elizabeth Warren's speech.
updated 6:29 PM EST, Thu November 20, 2014
obama immigration
David Gergen: It's deeply troubling to grant legal safe haven to unauthorized immigrants by executive order.
updated 8:34 PM EST, Thu November 20, 2014
Charles Kaiser recalls a four-hour lunch that offered insight into the famed director's genius.
updated 3:12 PM EST, Thu November 20, 2014
The plan by President Obama to provide legal status to millions of undocumented adults living in the U.S. leaves Republicans in a political quandary.
updated 10:13 PM EST, Thu November 20, 2014
Despite criticism from those on the right, Obama's expected immigration plans won't make much difference to deportation numbers, says Ruben Navarette.
updated 8:21 PM EST, Thu November 20, 2014
As new information and accusers against Bill Cosby are brought to light, we are reminded of an unshakable feature of American life: rape culture.
updated 5:56 PM EST, Thu November 20, 2014
When black people protest against police violence in Ferguson, Missouri, they're thought of as a "mob."
updated 3:11 PM EST, Wed November 19, 2014
Lost in much of the coverage of ISIS brutality is how successful the group has been at attracting other groups, says Peter Bergen.
updated 8:45 AM EST, Wed November 19, 2014
Do recent developments mean that full legalization of pot is inevitable? Not necessarily, but one would hope so, says Jeffrey Miron.
updated 8:19 AM EST, Wed November 19, 2014
We don't know what Bill Cosby did or did not do, but these allegations should not be easily dismissed, says Leslie Morgan Steiner.
updated 10:19 AM EST, Wed November 19, 2014
Does Palestinian leader Mahmoud Abbas have the influence to bring stability to Jerusalem?
updated 12:59 PM EST, Wed November 19, 2014
Even though there are far fewer people being stopped, does continued use of "broken windows" strategy mean minorities are still the target of undue police enforcement?
updated 9:58 PM EST, Mon November 17, 2014
The truth is, we ran away from the best progressive persuasion voice in our times because the ghost of our country's original sin still haunts us, writes Cornell Belcher.
updated 4:41 PM EST, Tue November 18, 2014
Children living in the Syrian city of Aleppo watch the sky. Not for signs of winter's approach, although the cold winds are already blowing, but for barrel bombs.
updated 8:21 AM EST, Mon November 17, 2014
We're stuck in a kind of Middle East Bermuda Triangle where messy outcomes are more likely than neat solutions, says Aaron David Miller.
updated 7:16 AM EST, Mon November 17, 2014
In the midst of the fight against Islamist rebels seeking to turn the clock back, a Kurdish region in Syria has approved a law ordering equality for women. Take that, ISIS!
updated 11:07 PM EST, Sun November 16, 2014
Ruben Navarrette says President Obama would be justified in acting on his own to limit deportations
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT