The Free Press
A simple plan to change the way credit rating agencies are compensated would restore some integrity to a system that many say failed in its watchdog role during the financial crisis of 2008.
But the progress of creating more integrity in our financial system appears to move slowly.
Sen. Al Franken pushed for the change as part of the Dodd-Frank financial reform bill and a version of his proposal made it into the final bill. Essentially, his plan called for removing the system were banks choose and pay for their own credit rating because it created conflicts of interest. Rating agencies like Moody's, S & P and Fitch have incentives to give the banks good ratings to continue to garner lucrative rating contracts.
Franken's idea was fairly simple: take the decisions of choosing a rating agency away from those who have a vested interest. While the initial legislation called for an independent board to assign rating agencies, a final version gives the power to the Securities and Exchange Commission.
Now Franken is pushing the newly appointed head of the SEC, Mary Jo White, to change the system of credit rating compensation and selection. Franken told The Hill news organization that we should remove the "pay to play" system and replace it with "pay for performance."
The idea makes a lot of sense and it's incumbent on the Obama administration -- as White is their appointee -- to make this happen, and do it sooner than later.
These are not inane regulations. They affect every American who uses a bank or invests in the market. Ratings of banks and other financial institutions are key to knowing their financial stability and soundness. A bad rating is a warning sign for regulators or others to take action.
Franken told The Hill: "The financial crisis profoundly affected the everyday lives of millions of people around the country in so many ways. People lost their homes, they lost their jobs and they lost their health insurance."
In an era where many financial institutions remain too big to fail and where former regulators continue to argue their are timebomb, phantom-like assets in big bank balance sheets, it's time we apply a little common sense to ensure the integrity of the system.