May 4, 2010
Hon. Al Franken
320 Hart Senate Office Building
Washington, DC 20510
Re: Support the Franken Amendment to Eliminate the Conflict of Interest in Credit Rating Assignments
Dear Senator Franken:
We are writing on behalf of the undersigned organizations to express our strong support for your amendment to strengthen the credit rating agency reform provisions of S. 3217. Your amendment would address a crucial weakness of the existing credit rating business model: the built-in conflict of interest between the rating agencies and the issuers who select and pay them.
Why did the ratings agencies gloss over the huge risks of mortgage-backed bonds and collateralized debt obligations? Because that was the way to attract business from the securities issuers who paid them, picked them, and, in many cases, had their help figuring out how to achieve the desired rating. The first imperative of reform is to bring the incentives of the ratings agencies into line with their mission.
Your amendment would accomplish this by authorizing the Securities and Exchange Commission to create a Credit Rating Assignment Board to take charge of the process of assigning bond offerings to ratings agencies. Rating agency performance could then be periodically compared on the basis of simple, transparent criteria, such as the number of times that investment-grade bonds defaulted or lost significant value. The most accurate ratings agencies could be rewarded with additional assignments. Those with the poorest records could, in extreme cases, be suspended or removed from the pool.
The mission that these companies so badly betrayed is a vital one. Even if regulators take steps to reduce investor reliance on ratings, as both the House and Senate reform measures urge, ratings agencies are needed to help investors accurately price risk and to allow issuers of bonds to compete for credit.
Your amendment fills an important gap in the Senate bill’s otherwise strong set of provisions to improve regulatory oversight of credit rating agencies. We are pleased to offer it our strong support.
Sincerely,
American for Financial Reform