What is more important than the hoopla over Illinois’ recent downgrade?

It has nothing to do with a legislative failure to break a constitutional contract with the state’s public employees. If there is a need for any reform, it should be the “credit ratings process” at the federal level.

“Earlier this year, the Justice Department filed a $5 billion lawsuit against Standard & Poor's -- one of the nation's Big Three credit rating agencies, which also include Moody's and Fitch. The lawsuit accuses S&P of knowingly giving AAA ratings to financial products the agency's analysts understood to be unworthy.

“Handing out sparkling ratings to deeply flawed securities represents a serious breach of trust on the part of a credit rating agency. But it was common practice for the Big Three. And in no small way, this practice enabled the financial meltdown of 2008.

“Under the current so-called ‘issuer pays’ model, agencies are paid by the Wall Street firms whose products they are rating. The agencies thus have a financial motive to satisfy issuers with a high rating: If an agency declines to give a particular product its seal of approval, the issuer can simply take its business -- and its fees -- elsewhere.

“In the lead-up to the financial crisis, the Big Three gave out AAA ratings to subprime mortgage-backed securities. The securities, of course, turned out to be toxic, but the agencies were paid anyway.

“What's worse, when Wall Street ran out of questionable mortgages to securitize, it created a whole new market based on bets on those securities, bets called ‘derivatives.’ The Big Three kept on handing out AAA ratings to these complicated new products, and were again paid handsomely to do so.

“The rating agencies made hundreds of millions of dollars, but in the end, it was American taxpayers who paid the price -- losing their savings, their homes and their jobs in addition to having to pay billions to bail out banks.

“In the wake of that catastrophe, there is bipartisan agreement that the credit ratings process needs serious reform. That is why we worked together on an amendment to the Dodd-Frank financial reform law -- and why the Franken-Wicker provision passed with bipartisan support…”


SEC must ride herd on credit rating agencies by Al Franken and Roger Wicker