September 27, 2019

Senator Warren to SEC: Do Your Job, Crack Down on Dangerous Inflated Bond Ratings

News reports suggest that bond rating agencies continue to mislead investors about safety of certain financial products

News reports suggest that bond rating agencies continue to mislead investors about safety of certain financial products 

Inflated bond ratings contributed to the 2008 financial crisis, which cost millions of Americans their homes, jobs, and houses 

Text of the letter (PDF)

Washington, DC - United States Senator Elizabeth Warren (D-Mass.) yesterday wrote to Securities and Exchange Commission (SEC) Chairman Jay Clayton regarding troubling reports of inflated bond ratings and the perverse incentives within the bond rating industry. She urged the SEC to take immediate action to protect the economy from risky lending propped up by conflicts of interest between bond issuers and rating agencies.

Bond ratings firms like Standard & Poor's (S&P) and Moody's issue ratings designed to help investors determine the risk levels associated with certain financial products. They assign letter grades to bonds, with a higher letter (for example, "AAA") indicating a safer bond, and a lower letter grade (for example, "D") indicating a riskier bond. The major rating agencies are for-profit companies that make money from the payments they receive from bond issuers. The issuers get to choose which bond rating agency to ultimately use, often after consultations with the rating agency that preview what the issuer's rating will likely be. This "issuer-pays" profit structure incentivizes the bond ratings firms to inflate bond ratings, in order to get an edge on competing ratings agencies and benefit the issuers.

Inflated ratings on mortgage-backed securities contributed to the 2008 financial crisis, which caused millions of Americans to lose their jobs, homes, and savings. The Dodd-Frank Act made a number of reforms to increase oversight of the ratings agencies, but the SEC and other federal agencies have neglected or delayed implementation of many of the changes. Recent reports revealed that more than ten years after the financial crisis, rating agencies are continuing to rubber stamp  risky products.

In her letter, Senator Warren called on the SEC to take action to curb these harmful practices and asked the SEC to provide answers to a number of questions before October 18, 2019.

She added today in a statement, "Before the crisis, rating agencies pocketed high fees while telling investors that mortgage-backed securities were safe, when they were really as dangerous as grenades with their pins pulled out. When they blew up, the economy came crashing down-robbing millions of Americans of their jobs, homes, and savings. A decade later, it's time for the SEC to finally do its job because American families can't afford another crisis."

Senator Warren has long been one of the nation's leading voices working to hold the big banks accountable for their role in the financial crisis. She has also raised awareness about the risks of increased lending to highly leveraged companies. In November 2018, she sent a letter to the nation's top regulators, expressing concern about the rapid growth of leveraged corporate lending and the inadequate response from the Financial Stability Oversight Council.

She has also called for stronger enforcement at the SEC since she took office in 2013. She led the opposition the new SEC Standards of Conduct Rules, called out the SEC for going easy on defunct for-profit colleges, and has urged the SEC to give workers a greater voice at public companies.