Senator and presidential candidate Senator Elizabeth Warren, D-Mass., wants the SEC to take “immediate” and “meaningful action to curb” inflated ratings by bond rating agencies.
In a letter to SEC Chairman Jay Clayton, Warren, citing a recent Wall Street Journal analysis, writes there are “strong indications” that ratings agencies are giving undeserved higher ratings to risky financial products, much like they did in the lead-up to the last great financial crisis. The recession that followed cost the U.S. economy as much as $14 trillion, according to Warren.
At the root of the problem then and now is the “issuer-pays model” whereby a corporate bond issuer pays a bond rating agency to rate their new issues. That provides an incentive for the rating agency “to give better ratings, regardless of the risk,” writes Warren.