In his scant two years in the Senate, Al Franken has tried hard not to be funny—and to avoid the spotlight.
The former Saturday Night Live comedian and current freshman senator from Minnesota says he still does no national TV, despite being asked regularly, and he only rarely talks to the national print media.
But Franken is so exercised about Standard & Poor’s that he spoke to National Journal on Tuesday about what he considers to be one of the biggest outrages to come out of the financial crisis of 2008: the continuing and unjustified dominance of a few giant ratings agencies such as S&P, which last week downgraded the U.S. government for the first time to an AA+ rating from AAA.
“I think the ratings-agency issue should live on its own merits,” said Franken. “But this event does help in one respect: It shows the incompetence of S&P.”
To little notice, Franken took on the ratings agencies almost single-handedly in the spring of 2010 when he added an amendment to the Dodd-Frank financial reform bill. Building on an earlier proposal from Rep. Brad Sherman, D-Calif., Franken came up with a way of breaking the near-monopoly that firms S&P, Moody’s, and Fitch had on the ratings field. He sought to create an intermediary board that would rotate credit-rating agencies among firms issuing securities.
To his surprise, Franken encountered resistance from then-Sen. Chris Dodd, D-Conn., who was ushering the bill, as well as the Treasury Department. “I don’t have any fruit baskets from them,” Franken said. Dodd and Obama administration officials wanted the Securities and Exchange Commission to study the issue further. Franken fought back and won compromise language making his plan go into force automatically if the SEC couldn’t come up with a better alternative. “We turned ‘may’ into ‘shall.’ A big victory," Franken said.
Franken is resigned to the SEC study, which isn’t due to be completed until 2012, but he says his amendment could have already made dramatic changes if it had been implemented right away. “I don’t know how much longer you have to study this. To me, the problem is there, and it’s obvious,” he said. Franken believes that the conflict of interest at the heart of S&P and the other giant firms is what precipitated the financial crisis.
Michael Barr, who was assistant Treasury secretary when the Dodd-Frank law was being written, told National Journal that "we agreed with Senator Franken that the ratings process was seriously broken and needed to be fixed.... [But] we thought the original version of the Franken Amendment was unworkable, would introduce new problems into the ratings system, would increase reliance on credit ratings, would not improve performance of the rating agencies, and would otherwise not further these objectives."
Because the big ratings agencies earn their revenues by taking fees from the investment banks for rating their securities—the so-called “issuer-pay model”—critics allege they are motivated to give better ratings to dubious securities. The ratings agencies did this to the tune of hundreds of billions of dollars during the credit bubble, delivering up AAA assessments to securities that were often based on junky subprime mortgages. “That’s what led to the whole meltdown as far as I was concerned,” said Franken. “The main thing is to reward accuracy and not to create incentives to give AAA ratings to junk—because if we don’t give them a AAA, we won’t get the next meeting.”
Although S&P did not seem to have that conflict of interest when downgrading U.S. debt last week, Franken said that “corruption breeds incompetence.… This underscores the importance of having the initial ratings agencies be selected by an independent board. Issuer pay is in and of itself a huge problem and we should eliminate it. If my bill had been implemented, what would happen is that different rating agencies emerge and have different areas of expertise. After a certain amount of time, you would establish a track record.”
S&P, Moody’s, and Fitch have largely escaped whipping for their performance during the subprime bubble. They continue to be anointed by the government as "Nationally Recognized Statistical Rating Organizations," in other words as arbiters of what banks, pension funds, and others restricted to "safe" investing can buy. Until recently they have even been given First Amendment protections afforded to journalists to protect them against liability for erroneous assessments.
Franken, a Harvard-educated comic who once wrote a best-seller titled Rush Limbaugh Is a Big Fat Idiot, has proved a surprisingly effective senator, many of his colleagues say. Not only did he tackle the ratings agencies, he sponsored a provision considered one of the most effective elements of the new health care reform law—raising the “medical loss ratio” to force insurers to spend far more on actual health care and less on CEO pay, marketing, and other nonmedical things.
Now, he says, he wants to tackle a fundamental rethinking of public education, starting with the reauthorization of the “No Child Left Behind” law, which he thinks needs to be fundamentally reconfigured. “To me our long-term deficit and long-term sustainability will be about how well our kids are educated,” he said.
But he’ll do it by keeping his head down. “I feel like I’ve been successful to do what I’ve been doing,” he said. “I’ve established myself with my colleagues, which is very important … and for the people of Minnesota to be seen as someone who went there to put his head down,” he said. “I have established my bona fides, so to speak.”
No one is laughing at that idea.