Skip to main content

SEC must ride herd on credit rating agencies

By Al Franken and Roger Wicker, Special to CNN
May 17, 2013 -- Updated 1157 GMT (1957 HKT)
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
December 13, 2014 -- Updated 2108 GMT (0508 HKT)
The NFL's new Player Conduct Policy was a missed chance to get serious about domestic violence, says Mel Robbins.
December 16, 2014 -- Updated 1740 GMT (0140 HKT)
The slaughter of more than 130 children by the Pakistani Taliban may prove as pivotal to Pakistan's security policy as the 9/11 attacks were for the U.S., says Peter Bergen.
December 17, 2014 -- Updated 1600 GMT (0000 HKT)
The Internet is an online extension of our own neighborhoods. It's time for us to take their protection just as seriously, says Arun Vishwanath.
December 16, 2014 -- Updated 2154 GMT (0554 HKT)
Gayle Lemmon says we must speak out for the right of children to education -- and peace
December 17, 2014 -- Updated 1023 GMT (1823 HKT)
Russia's economic woes just seem to be getting worse. How will President Vladimir Putin respond? Frida Ghitis gives her take.
December 17, 2014 -- Updated 0639 GMT (1439 HKT)
Australia has generally seen itself as detached from the threat of terrorism. The hostage incident this week may change that, writes Max Barry.
December 12, 2014 -- Updated 2020 GMT (0420 HKT)
Thomas Maier says the trove of letters the Kennedy family has tried to guard from public view gives insight into the Kennedy legacy and the history of era.
December 15, 2014 -- Updated 1456 GMT (2256 HKT)
Will Congress reform the CIA? It's probably best not to expect much from Washington. This is not the 1970s, and the chances for substantive reform are not good.
December 15, 2014 -- Updated 2101 GMT (0501 HKT)
From superstorms to droughts, not a week goes by without a major disruption somewhere in the U.S. But with the right planning, natural disasters don't have to be devastating.
December 15, 2014 -- Updated 1453 GMT (2253 HKT)
Would you rather be sexy or smart? Carol Costello says she hates this dumb question.
December 14, 2014 -- Updated 2253 GMT (0653 HKT)
A story about Pope Francis allegedly saying animals can go to heaven went viral late last week. The problem is that it wasn't true. Heidi Schlumpf looks at the discussion.
December 14, 2014 -- Updated 1550 GMT (2350 HKT)
Democratic leaders should wake up to the reality that the party's path to electoral power runs through the streets, where part of the party's base has been marching for months, says Errol Louis
December 13, 2014 -- Updated 2123 GMT (0523 HKT)
David Gergen: John Brennan deserves a national salute for his efforts to put the report about the CIA in perspective
December 12, 2014 -- Updated 1426 GMT (2226 HKT)
Anwar Sanders says that in some ways, cops and protesters are on the same side
December 11, 2014 -- Updated 1439 GMT (2239 HKT)
A view by Samir Naji, a Yemeni who was accused of serving in Osama bin Laden's security detail and imprisoned for nearly 13 years without charge in Guantanamo Bay
December 14, 2014 -- Updated 1738 GMT (0138 HKT)
S.E. Cupp asks: How much reality do you really want in your escapist TV fare?
December 11, 2014 -- Updated 1828 GMT (0228 HKT)
Rip Rapson says the city's 'Grand Bargain' saved pensions and a world class art collection by pulling varied stakeholders together, setting civic priorities and thinking outside the box
December 13, 2014 -- Updated 2310 GMT (0710 HKT)
Glenn Schwartz says the airing of the company's embarrassing emails might wake us up to the usefulness of talking in-person instead of electronically
December 12, 2014 -- Updated 2233 GMT (0633 HKT)
The computer glitch that disrupted air traffic over the U.K. on Friday was a nuisance, but not dangerous, says Les Abend
December 12, 2014 -- Updated 1740 GMT (0140 HKT)
Newt Gingrich says the CBO didn't provide an accurate picture of Obamacare's impact, so why rehire its boss?
December 13, 2014 -- Updated 0040 GMT (0840 HKT)
Russian aggression has made it clear Ukraine must rethink its security plans, says Olexander Motsyk, Ukrainian ambassador to the U.S.
December 12, 2014 -- Updated 0046 GMT (0846 HKT)
The Senate committee report on torture has highlighted partisan divisions on CIA methods, says Will Marshall. Republicans and Democrats are to blame.
December 11, 2014 -- Updated 1833 GMT (0233 HKT)
It would be dishonest to say that 2014 has been a good year for women. But that hasn't stopped some standing out, says Frida Ghitis.
ADVERTISEMENT