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Credit Rating Agency Reform

The inherent conflicts of interest in Wall Street's current pay-to-play credit rating system were one of the greatest contributing factors to the economy's collapse. Right now, banks choose which credit rating agencies will rate the quality of their stocks, bonds, and other financial products, resulting in the agencies giving away undeserved top ratings to countless sub-par financial products in order to attract business. 

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.

Sen. Franken's Restore Integrity to Credit Rating Amendment cleans up the credit rating system by making sure a bank or financial institution can't shop around among credit rating agencies to get a product's initial rating.  The bipartisan proposal creates a board, overseen by the Securities and Exchange Commission, which will assign credit rating agencies to provide initial ratings in order to eliminate inherent conflicts of interest.  Senator Franken's proposal passed the Senate by a 64 to 35 vote, and the final bill passed into law requires that the SEC study the problem.  If the SEC does not develop an alternative mechanism to address the conflicts of interest problem, Senator Franken's proposal will go into effect. 

 

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