$1.4 Billion Fine Puts Pressure on SEC to Implement Franken-Sherman Amendment on Credit Rating Agencies
Washington DC - Today, it was reported that the U.S. Department of Justice is near a settlement agreement that would require Standard and Poor's to pay $1.37 billion in fines for deceptively rating mortgage back securities. This now puts real pressure on the Securities and Exchange Commission to implement the Franken-Sherman amendment, which was passed as part of the Dodd-Frank Wall Street reform bill nearly five years ago.
Up to this point, the SEC has refused to implement the amendment, using a loophole that allows them to avoid changing the system if they determine that conflict of interests will not lead to deceptive ratings. Now the DOJ will share in a $1.37 billion fine because the current system does not work. As it was in the past, the current method allows the issuer selling mortgage-backed bonds to select the credit rating agency. Of course they select the one likely to give them the highest rating.
During the run up to the financial crisis, major credit rating agencies gave their highest ratings to pools of highly questionable mortgages. Credit rating agencies competed for clients because they could earn multi-million dollar fees on each assignment.
The Franken-Sherman amendment requires the SEC to adopt a new system in which the SEC would select the credit rating agencies based on the integrity of the ratings. No longer with the home team be able to select the umpire.
Congressman Sherman said in response to the potential settlement, “In December of 2013, the SEC issued a report saying all was fine with the credit rating system, so they didn't need to implement Franken-Sherman. Now the SEC must implement a new system. They can no longer claim that the old system avoids conflict of interest, unless they are willing to give back the $1.4 billion fine. You can't just say everything is fine, and then keep the fine.”
The proposed $1.37 billion settlement includes fines that will go to the federal government and a number of states, including $100 million to California.