Franken, Wicker, Schumer, Nelson Take On Conflicts of Interest in Credit Rating Agencies

Press Release

U.S. Sens. Al Franken (D-Minn.), Roger Wicker (R-Miss.), Charles E. Schumer (D-N.Y.), and Bill Nelson (D-Fla.) introduced the bipartisan Restore Integrity To Credit Ratings amendment to the Wall Street Reform bill currently being debated in the Senate. Their proposal would put an end to the conflicts of interest rampant in the current system, where banks and financial institutions pay agencies to rate the quality of their bonds and other financial products. Not surprisingly, this has resulted in the credit rating agencies giving out undeserved top ratings to countless sub-par financial products in order to attract business.

"If a failing student paid their teacher to turn their F into an A, everyone would agree that what the teacher had done was unethical. But right now, investors are being sold a phony bill of goods," said Sen. Franken. "Minnesotans understand value and they understand honesty. My proposal would make sure that when working people build their retirement security off of supposedly safe, top-rated bonds, they can be confident that that rating is honest. It's time that we protect consumers from the pay-to-play system that rewards Wall Street players at the expense of Main Street customers."

"Credit-rating agencies have made so many mistakes in the past, and we must assure their ratings are accurate," said Sen. Wicker. "A well-functioning marketplace requires an accurate and credible credit-rating system because it is the primary signal investors use to assess the creditworthiness of certain investments. In the past, rating agencies were too willing to rubber-stamp an excellent score for complex securities that were not well-understood and were not deserving of a triple-A rating."

"As the Bible says you can't serve two masters, and in this case that looks like what the credit agencies tried to do," said Sen. Nelson. "We have to put an end to the practice and make sure the rating agencies are reliable."

The Senate Permanent Subcommittee on Investigations recently revealed examples of Wall Street financial institutions negotiating higher ratings from credit rating agencies for its sub-par products. Of the AAA-rated subprime-mortgage-backed securities issued in 2006 alone, 93% have been downgraded to junk status.

The most effective way to reduce the conflicts of interest is to provide a check on the ratings issued by the credit rating agencies. The Restore Integrity To Credit Ratings amendment provides a check by making sure a bank or financial institution can't shop around among credit rating agencies to get a product's initial rating. This would give credit rating agencies incentive to provide accurate ratings, not issue top-grade ratings just to lock-in a customer.

The bipartisan proposal would create a board, overseen by the Securities and Exchange Commission, which would assign credit rating agencies to provide initial ratings in order to eliminate inherent conflicts of interest. This would increase competition by enabling smaller credit rating agencies to finally have an opportunity to compete against the largest three agencies, which have abused the current model. Financial institutions could obtain subsequent ratings without the participation of the board. All ratings and discrepancies between them would be publicly available.

The board would be made up of a majority of investors, a representative from the investment banking industry and credit rating agency industry, and an independent member.

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