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Mr. FRANKEN. I rise today to discuss the confirmation of Mary Jo White as Chair of the Securities and Exchange Commission.
Ms. White has had an impressive career--from prosecuting terrorists and white-collar criminals as a U.S. attorney for the Southern District of New York to heading a large litigation department in private practice. There is little doubt that Ms. White has the Wall Street expertise necessary to navigate the complex issues before the SEC.
I come to the floor today to discuss a critical problem I have asked Ms. White to prioritize as Chair of the SEC. Currently, when a bank issues a structured finance product, it needs to get the product rated by the credit rating agencies, and the bank pays them for the ratings. The banks have an interest in getting high ratings, and the credit rating agencies have an interest in getting repeat customers. Of course, this creates a fundamental conflict of interest. This conflict played a key role in the financial meltdown. It is a problem we sought to address in the Dodd-Frank financial reform legislation we passed in 2010. Yet it is a problem that remains. It is awaiting action by the SEC--more than 5 years after the financial crisis hit and nearly 3 years since Dodd-Frank was signed into law.
Resolving the problem of the conflict of interest in the rating industry will be a vital test of the SEC under Ms. White's chairmanship. In a meeting we had together last month in my office, Ms. White expressed her appreciation of the importance of this issue and her commitment to scrutinize conflicts of interest inherent in the credit rating industry. I look forward to working with her to find a meaningful solution to alleviate the ongoing threat to our financial system posed by these conflicts of interest. The next concrete step in that process is a roundtable the SEC will hold on this issue in May. That roundtable must be a balanced assessment of the issue, and it must lead to meaningful action by the SEC.
This is not, to be sure, the only issue in financial reform facing the SEC. I wish to talk a little bit about why I care so passionately about reforming the credit rating process and why this is so important.
In the years leading up to the 2008 financial collapse, the credit rating agencies were enjoying massive profits and booming business. Of course, there is nothing wrong with massive profits and booming business in and of themselves, but there was one fundamental problem: Booming business was coming at the expense of accurate credit ratings, which is supposed to be the entire reason for the existence of the credit rating agencies.
The fact that the credit rating agencies were not providing accurate ratings should come as no surprise given the industry's compensation model. Credit rating agencies were and still are paid to issue ratings directly by the big Wall Street banks issuing the paper and requesting the ratings. If a rating agency--let's say Moody's--doesn't provide the triple-A rating the bank wants, the bank can just take its business over to Fitch or S&P's. That is called ratings shopping, and it continues to this day. The opportunity for ratings shopping creates an incentive for the credit raters to give out those triple-A ratings even when they are not warranted, and that is exactly what happened with the subprime, mortgage-backed securities that played such a crucial role in the financial crisis, and it happened over and over again. It became ingrained in the culture of the industry.
The Permanent Subcommittee on Investigations, chaired by Senator Levin, took a close look at the big three credit rating agencies, examined millions of pages of documents, and released an extensive report detailing the internal communications at Moody's, S&P, and Fitch. Among the many troubling e-mails, there was one from an S&P official that sums up the prevailing attitude quite nicely: ``Let's hope we are all wealthy and retired by the time this house of cards falters.''
With all the risky bets in the financial sector--and bets on those bets--our financial sector had indeed become a house of cards. But without the conduct of the credit raters, the house of cards would have been one card tall because it gave triple-A ratings to these bets on bets on bets--these derivatives.
Two years after that e-mail was written, that house of cards didn't just falter, it collapsed. Because that house of cards had grown so tall--thanks to the credit rating agencies--when it collapsed, it brought the
entire American economy down with it. The financial meltdown cost Americans $3.4 trillion--let me say that again--$3.4 trillion in retirement savings. It triggered the worst crisis since the Great Depression with its massive business failure and mass foreclosures and job losses and the explosion of our national debt.
The crisis profoundly affected the everyday lives of millions of people across the country in so many negative ways, including in Minnesota. People lost their homes, their jobs, their health insurance. I know the Presiding Officer saw it in New Mexico. I saw it in Minnesota. Every Senator here saw it in their State.
In May 2010 I called on Minnesotans to participate in a field hearing to learn about their experiences during the financial collapse. I would like to share some highlights from the testimony presented by Dave Berg of Eden Prairie, MN.
My situation mirrors the situation of thousands of Minnesotans in my age group--and illustrates why it is so important to reform the way Wall Street operates. I am 57 years old and looking for a job. After having spent most of my career in the IT field, I have been out of work for 14 months ..... Throughout my working career, I saved for retirement. I participated in pension and 401(k) plans that my former employers matched. I thought I would have a secure retirement because I was doing the right thing ..... Much of my overall retirement security is now gone ..... At the age of 57, I need to again start building up a nest egg so I can hopefully retire in my seventies. This was not my plan.
As a job seeker in my 50s, I am not alone. Twice weekly, I meet with groups of job seekers, many of whom are in the same situation as I am. While we keep our outlook positive, most of us are faced with the prospect of starting over and we are resigned to the fact that we could be working in our seventies.
The downturn of the economy, caused in part by the abuses on Wall Street, led to the loss of my retirement security. Reforming the way Wall Street operates is important to me personally, because I have a lot of saving yet to do--and I simply cannot afford another Wall Street meltdown. I need to have confidence in the markets--and I need to know that there is accountability to those who caused this financial crisis.
As Dave points out, he is not alone. Everyone in this body has heard stories like this. It is hard to overestimate the extent to which the credit rating agencies contributed to the financial crisis in which thousands of Minnesotans lost their homes, thousands lost their jobs, and far too many Minnesotans had their hopes for the future dashed.
They are not seeking retribution from Wall Street, they just need to know it will not happen again. They know that there is a problem and that the problem needs to be fixed. We do not need further proof of that, but we get it in the recent complaint filed by the Department of Justice against S&P in which DOJ alleges--as it said when it filed the complaint--that the credit rating agency ``falsely represented that its ratings were objective, independent, and uninfluenced by S&P's relationships with investment banks when, in actuality, S&P's desire for increased revenue and market share led it to favor the interests of these banks over investors.''
The complaint highlights the patently problematic way the credit rating agencies habitually did their business. One e-mail obtained in the investigation from a high-level S&P official reads:
We are meeting with your group this week to discuss adjusting criteria for rating CDO's of real estate assets ..... because of the ongoing threat of losing deals.
CDOs--collaterized debt obligations--are one of those derivatives or bets that added stories to the house of cards. This official had apparently become so comfortable with the culture of conflicts of interest that he appeared to have no reservations about putting it in writing.
I am glad the Department of Justice is pursuing a case against the S&P, but DOJ's action is not enough. It is backward-looking and addresses past harms, but my concern is that the conduct continues to this day. The credit raters are still influenced by the relationships with the banks because that is who pays them.
It is a clear conflict of interest and we need to prioritize actions that will prevent another meltdown in the future.
That is exactly what Congress--and I--did as part of the financial reform legislation in 2010. As part of the Dodd-Frank Wall Street reform act, I proposed a solution with my friend and colleague Senator Roger Wicker of Mississippi. If our provision is implemented in full, it would root out the conflicts of interest from the ``issuer pays'' model. The amendment Senator Wicker and I offered to the financial reform bill directed the Securities and Exchange Commission to create an independent self-regulatory organization that would select which agency--one with the adequate capacity and expertise--would provide the initial credit rating of each product. The assignments would be based not only on capacity and expertise but also, after time, on their track record. Our approach would incentivize and reward excellence. The current pay-for-play model--with its inherent conflict of interest--would be replaced by a pay-for-performance model. This improved market would finally allow smaller rating agencies to break the Big Three's oligopoly.
The oligopoly is clear. The SEC estimates that as of December 31, 2011, approximately 91 percent of the credit ratings for structured finance products were issued by the three largest NRSROs--Fitch, Moody's, and S&P--each of which was implicated in the PSI investigation. The other five agencies doing structured finance make up the remaining 9 percent.
The current oligopoly doesn't incentivize accuracy. However, if we move to a system based on merit, the smaller credit rating agencies would be better able to participate and could serve as a check against inflated ratings, helping to prevent another meltdown.
In our proposed model, the independent board would be comprised mainly of investor types--managers of endowments and pension funds--who have the greatest stake in the reliability of credit ratings, as well as representatives from the credit rating agencies and banking industries, and academics who have studied this issue.
Our amendment passed the Senate with a large majority, including 11 Republican votes, because this is not a progressive idea and it is not a conservative idea--it is a commonsense idea.
The final version of Dodd-Frank modified the amendment and, to be frank, put more decisionmaking authority in the hands of the SEC in how to respond to the problem of conflicts of interest in the credit rating industry. The final version directed the SEC to study the proposal Senator Wicker and I made, along with other alternatives, and then decide how to act.
The SEC released its study in December. The study acknowledged the continued conflicts of interest in the credit rating industry and reviewed our proposal and many of the alternatives, laying out the pros and cons of each without reaching a definitive conclusion on which route to pursue.
The next step is a roundtable the SEC is holding on May 14. I will be participating in the event, and I hope that under Ms. White's leadership the SEC will make the roundtable a meaningful and balanced discussion of the different possibilities for reform. I have said all along that I believe the proposal of Senator Wicker and myself is a good one--and the right one--the more I have thought about it and looked at it over these few years. But if someone makes a compelling case for an alternative--an alternative that truly alleviates this danger of this inherent conflict of interest--I will gladly lend it my support. Following the roundtable the SEC must take prompt and decisive action to implement a meaningful plan for reform.
But don't get me wrong. The need for reform is obvious and necessary, and I will pursue this issue until the American economy is no longer subject to these unnecessary risks. Too many Minnesotans--too many Americans--were devastated by a financial crisis to which the credit rating agencies contributed mightily. The conflicts of interest in the credit rating agencies must be addressed so they don't contribute to yet another crisis.
Ultimately, it is up to the SEC to act, and the action they take on this issue will be an important measure of Ms. White's tenure as chair of the Commission. Ms. White has assured me she will give this critical issue the attention it deserves. I congratulate Ms. White on her confirmation and I do intend to hold her to that commitment. I look forward to working with her and the rest of the Commission on this very important issue.
Mr. President, I yield the floor and note the absence of a quorum.
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