Sen. Franken and Others Address Rating Agency Reform

Sen. Al Franken (D-Minnesota) continues to express concerns that the new rules regarding ratings agencies are not addressing fundamental issues with ratings procedures. Franken and several others believe ratings agencies inflated assessments of mortgage-backed securities and that these inflated ratings ultimately led to the financial crisis.

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In 2010, Franken proposed an amendment to Dodd Frank that would require an independent board to assign credit ratings agencies to specific issuers to prevent the current method of ""ratings shopping."" The board would consist of people from the investment community, along with representatives from ratings agencies and banks.

""The amendment would take away issuers' primary leverage - the threat to take their business elsewhere,"" Franken said in a conference call Thursday.

During the call hosted by Americans for Financial Reform - a coalition of more than 250 members working for financial reform - Franken and two other industry experts spoke out on the inherent conflict of interest in ratings agencies and the need for reform.

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Former managing director of Moody's, Eric Kolchinsky, echoed Franken's concerns about ""ratings shopping"" and said that so far there has been little change in behavior among rating agencies.

Kolchinsky has testified to the Senate Permanent Subcommittee on Investigations on rating agency performance and regulation.

He noted previous investigations that revealed emails from managers instructing analysts to give specific issuers high ratings in order to keep their business.

Current rules require ""a strict firewall between analysts and marketing staff,"" said Barbara Roper, director of Investor Protection for the Consumer Federation of America. ""It is upper management not lower-level marketing staff"" who should be the focus, she said.

Franken was surprised that his amendment did not receive more initial support. It was downgraded to a study. However, the final wording required that the amendment be implemented if the study finds a conflict of interest still persists in ratings agencies.

Franken said he does not see how the study could find otherwise. ""The wisdom of this, I think, is becoming pretty apparent,"" Franken said.

""I don't think the proposal put on the table matches the severity of the problem they're intending to solve,"" Roper says of the SEC's current rules on rating agencies.

Without further regulatory oversight and a removal of the conflict of interest, ""we will see and are already seeing a return to the practices that landed us in financial crisis,"" Roper said.