Here's a little insight:What is Democratic Sen. Al Franken’s big idea to clean up the credit rating system? Transparency.
Franken, a junior senator from Minnesota, criticizes the Securities and Exchange Commission’s inaction on a 2010 amendment he sponsored that would have eliminated conflicts of interest in the credit-rating business model.
“Our financial system is kind of rigged,” Franken said in his first prime-time interview Monday with The Last Word with Lawrence O’Donnell.
Franken wants to institute an independent board made up of investors, financial analysts and bankers who would determine rating criteria, instead of the ratings firms.
“They made a lot of money, but Americans lost trillions of dollars, they lost their homes, lost their businesses, they lost their pension savings, they lost their jobs,” Franken said of the failure of the ratings process that contributed to the financial collapse of 2008.
“Minnesotans lost their jobs because the credit rating agencies didn’t do the only job they’re supposed to have, the only job they had, which is to give accurate, objective ratings to financial products,” he said. - MSNBC, 5/13/13
Franken went on to explain his approach to cleaning up the credit rating system:The ratings firms have been widely criticized for contributing to the 2008 financial crisis by issuing high ratings to toxic securities backed by residential mortgages.
Since then, the way these firms are compensated has come under scrutiny, with critics arguing that the agencies have a conflict of interest because they’re paid for their analysis by the very banks and corporations whose products they’re rating.One proposal designed to end this “pay to play” dilemma comes from Sen. Al Franken (D-Minn.), who is pushing to have the Securities and Exchange Commission set up an independent board that would assign financial products such as bonds to credit-rating agencies to rate, rather than allow banks and companies to choose which agencies to use.
The approach will be debated Tuesday when the SEC holds a day-long roundtable to discuss the credit-rating agencies’ business model with industry officials, academics and investor advocates. But several analysts who track the issue say it’s unlikely that the SEC will adopt a plan that separates hiring from payment, in part because doing so is not as simple as it appears.
“There just doesn’t seem to be enough support in Washington to blow up the business model,” said Jaret Seiberg, an analyst with Guggenheim Partners. - Washington Post, 5/13/13
Franken argues that cleaning up the credit rating system is essential to preventing another financial meltdown:Franken spoke to reporters about his efforts to eliminate a situation that emerged during the 2008 financial crisis where rating agencies issuing ratings came under stinging criticism for giving their highest marks, such as the coveted AAA, to mortgage securities packaged from subprime loans. His comments come one day before the SEC holds a three-panel roundtable to discuss the issue, which still percolates years after the financial crisis.
“The sad fact is that the same rigged system still exists,” Franken said. “In my opinion the best model produced thus far is mine. Does it have to be exactly what I offered? No. If the SEC feels there is a better model that addresses the inherent conflict of interest where the issuer chooses and pays the rating agency I would love to see what they come up with.”
A provision in the Dodd-Frank Act, written in 2010 in response to the financial crisis, introduced by Franken required the SEC to write a study and make a recommendation about whether the commission should set up an independent board that would chose the right credit rating agency for each packaged mortgage product put out by a bank based on the credit rating agency’s capacity, expertise and, after some time, track record.
The goal is to separate the payment of the rating from the selection of the rater, eliminating a practice known as “ratings shopping” where an investment bank privately solicits preliminary ratings from multiple agencies for a securitized product and then only pays for and discloses the most favorable rating received.
The SEC finished its study, describing a number of alternative models to how ratings are crafted, and is holding a roundtable about the issue Tuesday — in other words, there is still no resolution to the issue.
In the balance is the future of the big three credit rating firms, McGraw-Hill Cos. Inc.’s MHP +0.20% Standard & Poor’s, Moody’s Corp. MCO -0.20% and Fimalac SA’s Fitch, which Franken called an “oligopoly.”
Franken defended his approach and raised concerns about an existing system that became effective in 2010 that the agency implemented to allow other rating agencies to produce unsolicited ratings. The rule requires a bank issuing a pooled mortgage product to share data about the security privately with other rating agencies via a secured password-protected website. The goal was to provide some checks and balances to ratings produced by the major raters but in reality it has rarely been used.
“It certainly isn’t sufficient at all,” he said, adding that it or a “modified” version of the rule can co-exist with his approach. - Wall Street Journal, 5/13/13
If you would like to get more information, please contact Senator Franken's office for more details:In the run-up to the Great Recession, allowing financial institutions to choose their own rating services led to AAA ratings for what Franken called “junk” that cost Americans trillions of dollars.
Rating agencies knew that if they didn’t give top financial safety clearances to very risky financial instruments, they would “not get the next lucrative contract” from banks and brokerages, the Minnesota Democrat charged.
Franken sponsored an amendment to the Wall Street reform act passed in 2010 to deal with what he considers inherent conflicts of interest in the current ratings process. The final bill only required a study to determine the extent of the problem.
A study released in December 2012 that found continuing conflicts of interest should be enough to force the SEC to act, Franken said Monday.
“If we don’t do this,” Franken said, “we’re setting ourselves up for another meltdown.” - Star Tribune, 5/13/13
And if you would like to donate to Al's 2014 campaign so he can continue to fight for consumers and the middle-calls, you can do so here: