Restoring American Financial Stability Act of 2010

Floor Speech

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Mr. SCHUMER. Madam President, I rise in strong support of the Franken amendment.

First, I wish to praise my colleague from Minnesota for the great job he has done on this amendment. This is going to make a huge difference. It strengthens the section that is already in Senator Dodd's fine bill, on which Senator Jack Reed did great work, and now it goes a little further.

In particular, I thank my colleague from Minnesota for really getting at the heart of the conflicts of interest. We can vote around the conflict of interest, we can shine a mirror of light on the conflict of interest, but unless we get to the heart of it, we are not going to undo the problem. The Senator from Minnesota does that, and I praise him for his fine work. I think that if this amendment passes, it is going to be one of the lasting contributions and one of the most significant contributions to prevent a future crisis from happening.

Nobel economist Joseph Stiglitz said:

I view the rating agencies as one of the key culprits ..... They were the party that performed the alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the rating agencies.

Credit rating agencies played an important role--an unfortunate and important role--in what led up to the financial crisis. They adopted questionable practices intended to win over clients and capture greater market share, ignoring the true credit quality of the complex securities at the heart of the market meltdown. They neglected their own internal controls and developed a coziness with clients. And because rating the complicated structured finance products brought in more money to these agencies, they raced each other to the bottom, competing for clients by inflating ratings. Because the clients had an incentive to sell products with the highest ratings to investors, the rating agencies would give them advice on how to structure their products to score AAA. This race to the bottom is the easiest, quickest, and least disputatious. Giving an AAA rating is one of the major culprits of the financial crisis we are seeing.

The conflict of interest-ridden industry helped bring our economy to its knees. To provide one example, 93 percent of AAA-rated subprime mortgage-backed securities issued in 2006 have been downgraded to junk status. Is that incredible? Ninety-three percent went from AAA to junk status. That is not an accident and, frankly, that doesn't just happen because people make mistakes. There was something more pernicious at work, which was conflict of interest. That is the fundamental problem. Again, 93 percent of the securities the rating agencies concluded were of the highest quality, least risky investments, in just 2 years they became worthless. Many people lost money. Some were big investors, some were small investors, some were large banks and institutions, and some were pension funds that had the savings of millions of hard-working Americans. Everyone suffered because of what the credit rating agencies did. This bill we are debating this week makes important strides in holding the rating agencies accountable to their credit quality assessments.

Once again, I commend Senator Dodd, our able chairman, and Senator JACK REED, our able chairman of the securities subcommittee, for the immense work they did in this area. Requiring the creation of a new Office of Credit Rating Agencies at the SEC; disclosures of rating methodologies; prohibiting compliance officers from working on ratings methodologies or sales; a new liability provision; and requiring rating analysts to pass qualifying exams all helps.

As I said, the provision Senator Franken is offering and I am proud to cosponsor goes to the heart of the conflict of interest. It doesn't go around the edges of the conflict of interest but is a dagger at the heart. This amendment breaks that inherent conflict by having a third party, a neutral third party, step in-between. Issuers will no longer be able to choose a rating agency and directly influence what kind of ratings they get.

The amendment establishes a board of highly knowledgeable and experienced people, a majority of whom will be from the investor industry, including pension funds, municipalities, and retail investors who got clobbered in this financial crisis because the rating agencies were getting paid by the issuer and had an incentive to issue the best rating possible.

How the heck--this is a little digression--how the heck no-doc loans got AAA ratings over and over, packages of no-doc loans--what does that mean to the average person? It means they never asked you if you could afford to pay the mortgage, and they got AAA credit ratings. What was going on, and why didn't anyone catch it? Well, the Dodd part and the Reed part of the amendment will catch it, but the Franken part of the amendment will prevent it by having a noninterested party make a rating.

The Franken amendment establishes a board of highly knowledgeable and experienced people, as I said. They have to submit their products to be rated to the board and, like a wheel, the board will choose a rating agency for each product. When I say a wheel, it is like a wheel; it comes up randomly. Where did Senator Franken--and I have spoken with him about this, so I know--where did he come up with this idea? This is how we prevent forum shopping, bias of judges. When you go to the Southern District of New York and you have a case, it is a wheel and you get a judge randomly. In the past, we have found there were even conflicts of interest in the judiciary because you got to choose your own judge, just as the issuer now gets to choose its own credit rating agency. The wheel makes it random. You don't choose it. That is a big, huge step forward.

The board will also monitor the performance of these ratings and ensure the rating agencies are qualified to rate the products. This model will motivate rating agencies to develop and gain the right expertise and methodologies so they can become eligible to rate different classes of structured finance products, and the smaller rating agencies and investor-paid agencies will have a level playing field to compete against the big three.

This proposal has a broad range of bipartisan support. I greatly appreciate not only Senator Franken's outstanding work on this issue but the cosponsorship of Senators Nelson, Whitehouse, Brown, Murray, Merkley, Bingaman, Lautenberg, Shaheen, Casey, Sanders, Johnson, Kaufman, Durbin, Harkin, and--thank you to our Republican friends--Senators Wicker and Grassley.

So I hope we will get unanimous support for this amendment. I hope we won't leave out any major provisions. I hope we won't modify it or weaken it. Let's stick to this amendment. It is modest and thoughtful and goes to the heart of what helped cause the financial crisis--the inherent conflict of interest in the way credit rating agencies worked.

I yield the floor.

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