Franken asks newly confirmed SEC head to change credit rating payment model

Franken complained that credit rating agencies, such as Moody’s, S&P and Fitch, are paid by the banks asking for AAA credit ratings, meaning that agencies have an incentive to give all investments high credit ratings even if they don’t deserve it, in order to keep the banks’ business. Franken said this “conflict of interest” played a large role in the “financial melt down” in 2008.

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Franken said that instead of a “pay to play” model, credit rating agencies should instead have a “pay for performance model.” Franken added that his idea would allow smaller credit ratings firms to compete with the major firms.

“A system based on merit would allow smaller agencies to better participate … helping to prevent another meltdown,” Franken said, adding that he tried to incorporate this idea into the Dodd-Frank financial reform legislation. Franken said instead of creating a board to determine which credit rating agencies have the best performance record, the final Dodd-Frank bill gave the SEC the power to change the system.

According to Franken, White promised to make this issue a high priority. He said she could prove it by taking swift action after a roundtable meeting that will be held in May.

“The next step is a roundtable the SEC is holding on May 14,” Franken said. “I hope under White’s leadership the SEC will make the roundtable a meaningful part of a solution. … The SEC must take prompt and decisive action to implement meaningful reform. Ultimately it is up to the SEC to act.”

On Monday, the Senate approved White’s nomination through a unanimous consent agreement.