Remember how crooked accountants like Arthur Anderson helped create the Enron disaster? Well the credit rating oligopoly of the Big Three (Moody’s, Fitch and Standard & Poor’s) is doing almost the same thing, and Senator Al Franken wants to put a stop to it.
As Senator Franken told ABC news
“If a failing student paid their teacher to turn their F into an A, everyone would agree that what the teacher had done was unethical … But right now, investors are being sold a phony bill of goods. We need to protect consumers from the pay-to-play system that rewards Wall Street players at the expense of Main Street.”
Al Franken has an Amendment to the Wall St reform bill that will bring this to an end.
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You see, what Arthur Anderson was to Enron, the Big Three credit rating agencies are to the Too Big To Fail banks. The only way Arthur Anderson could get Enron’s business was by knowingly and fraudulently cooking their books. The only way the Big Three crooked credit rating agencies can get business from TBTF banks is by knowingly and fraudulently giving them good ratings, even when they are failing. That is their profit motive, to cook the books.
Sen. Franken proposed an amendment to create a Credit Rating Agency Board, supervised by the Securities and Exchange Commission, which would assign credit rating agencies to provide initial ratings in order to reduce conflicts of interest. This would increase competition by enabling smaller credit rating agencies to finally have an opportunity to compete against the largest three agencies.
Watch Senator Franken explain the whole thing with political cartoons! (Presumably for those slower, Conservative Senators)
Here’s what the amendment would do. It would allow the SEC to set up a self-regulatory organization (that is, one not created by Congress) called the Credit Rating Agency Board. The CRAB, made up of investors as well as independent regulators, would then create a roster of qualified rating agencies, and select a method of assigning initial ratings on securities to those agencies. The amendment would encourage randomization but not mandate it. Staffers explained to me that a literal randomization would swamp the smaller rating agencies, who wouldn’t be able to handle the workload, relative to the big three of Moody’s, Fitch and Standard & Poor’s. The rating issuance would have to account for the performance of the rating agencies, and the board would not know which agency the issuer preferred.
Issuers could then go out and get a secondary rating after this initial rating, but the initial rating would stay on the record of the security. Franken staffers believed this would prevent deals where the issuing bank haggles with a rating agency for a better rating, and would lead to more accurate results, even in the secondary ratings, since a variance between that and the initial rating would raise eyebrows.
So here is the rub; if you miss a single payment on your credit card your credit rating takes a huge hit, but if the bank that owns your credit card is thisclose to failing, they get a Triple A rating. Why? Because they provide the credit ratings agencies with millions and billions of profit and you do not.
In a normal, sane world, this is called fraud, and I am glad to know that I am not the only one calling it that.
Do you remember the Lehman Bankruptcy? Well it seems that Ron Grassi is suing the three credit rating agencies for negligence, fraud and deceit. Mr. Grassi invested $40,000 in Lehman bonds because they had an A rating. With this small but significant lawsuit Grassi could blow the lid off the bogus ratings given out by rating agencies over the past several years. Mr. Grassi feels that more than anything else, the false ratings were the cause of the financial meltdown.
Practically everyone in the financial industry depends on the big three: Fitch Rating, Moody’s Corp (NYSE: MCO) and Standard and Poor’s for making their financial decisions. This includes mutual funds, hedge funds, insurance companies and even the Federal Reserve. Credit agencies helped create $3.2 trillion of subprime mortgages.
In the midst of all the chaos, profit margins for the rating agencies rose sharply. Moody’s profit margins were up 52% and they reported a profit of $1.76 billion, and made huge profits even during the collapse of 2008.
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Yeah, that’s the ticket. Fraud, deceit and negligence. That sums up perfectly what the Credit rating oligopoly has been up to.
Here is Senator Franken’s entire floor speech from Thursday when he first proposed his Amendment to the current Wall St reform bill.
Senator Franken is spot on with his assessment of the crooked credit ratings agencies. Over in Europe, similar regulations and competition are being proposed for the oligopoly of credit ratings agencies.
Some European officials are calling for curbs on rating agencies like Standard & Poor’s, Moody’s Corp. and Fitch Ratings. They argue that conflicts of interest and bad information make the agencies’ assessments unreliable, even dangerous.
Germany’s foreign minister went so far Thursday as to suggest that the European Union should create its own rating agency. He spoke after downgrades of Greece and Portugal roiled financial markets and stoked fears that Europe’s debt crisis was spreading.
How ratings agencies are paid is also coming under scrutiny. The money they earn comes from the institutions whose products and debt they rate – a point of contention in the U.S. and Europe. At a hearing last week on the agencies’ role in the financial crisis, U.S. Sen. Carl Levin called that pay system an “inherent conflict of interest.”
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I much prefer Senator Franken’s idea for an independent credit rating panel that would povide non profit competition and unbiased credit ratings over the European idea for an EU controlled agency, as an EU controlled organization would be just as prone to bias in favor of European controlled banks as a private credit ratings agency is biased towards the private Too Big To Fail banks that provides them a profit, but that is just my opinion, and I tend to err in favor of competition, but I am no expert, and if someone knows more on the subject than I do I would be glad to hear their ideas.
But one thing I do know is that the Oligopolies that dominate so many of America’s industries are strangling the majority of Americans with their fraud, deceit and negligence. The fraud in this scheme works like this, the credit raters give good ratings no matter how crappy the credit of the big banks are, because they are their clients and that is how they make their money. This leads investors to believe they are making a good bet, when they are really betting on a lemon with a new paint job. I call that fraud, but on Wall St it is called business as usual, and it has to end.
And though I do not trust the Senate anymore than I’d trust a shark cage made of salami, I applaud the efforts to reign in the Oligopolies made by those stalwart Progressives such as Al Franken, Sherrod Brown and Bernie Sanders. It is efforts such as theirs that give me hope.
When I hear Corporatist Conservatives shriek about a Guvmint takeovah I know what the reality is, it is the Corporate takeover of everything they can get their hands on. Why? Money!
So let’s fight back, like Senator Al Franken and others are doing. If not now, when?
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Crossposted at ProgressiveElectorate.com