Today Congressman Brad Sherman (D-Sherman Oaks) issued the following statement about the lawsuit filed by the Justice Department against Standard & Poor's Rating Services on Monday, February 4:
"This action by the Justice Department against Standard & Poor's regarding mortgage-backed bonds rated by S&P shines a light on slow action by the SEC to enforce the Franken-Sherman Amendment to the Wall Street Reform and Consumer Protection Act, also known as Dodd-Frank.
"The rating of bonds is the only arena where the umpire is selected and paid by one of the teams. When bond rating agencies are selected by those who are selling the very bonds they are evaluating, and when the bond rating agencies can earn millions of profits per contract, there is an incentive to try to please the bond issuers. That is why Senator Franken and I worked to change the system so that an independent body would select the bond rating agency and providing high ratings would not be the road to high profits for the rating agencies."
Congressman Sherman first offered a proposal in October 2009 to require the Securities and Exchange Commission (SEC) to end conflicts of interests in the selection of credit rating agencies by requiring an independent entity to assign credit rating agencies impartially. Senator Al Franken (D-MN) then championed the idea in the Senate, and successfully passed an amendment through the Senate to require the SEC to create a Board to independently assign qualified credit rating agencies to rate issuances. In June 2010, Sherman appeared before the conference committee on financial regulatory reform to advocate for the proposal. The final version of the Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010, required the SEC to conduct a study, and then implement the Franken-Sherman Amendment within two years, unless a credible alternative to ending conflicts of interests is identified. The SEC is now over six months behind in enforcing the Franken-Sherman Amendment.
Senator Franken noted the importance of credit rating agencies in the statement he released yesterday:
"Our nation's financial meltdown happened in no small part because credit rating agencies had a perverse incentive to give triple-A ratings to financial instruments that turned out to be junk," said. U.S. Sen. Al Franken. "In turn, investors in Minnesota and across the country relied on those ratings when making investments and were badly hurt financially."
Likewise, the Financial Crisis Inquiry Commission said the financial crisis "could not have happened without the rating agencies."
"It is time for the SEC to implement the law," Congressman Sherman said. "The present system has failed. Bond rating agencies like Standard & Poor's gave triple A ratings to alt-A bonds. In the future, those selling mortgage-backed bonds should not select the credit rating agency that would evaluate those bonds. Bond rating agencies will be free to give tough grades, when warranted, without the fear of losing business and profits."