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Editorial: Big money could stymie reform

Does anybody out there remember the great recession of 2008-2009?

Millions of people lost their jobs. Millions of people lost their homes. The stock market sunk like a stone. Housing prices collapsed.

That great recession.

It was caused by subprime mortgages being bought and sold like candy – all with juicy AAA ratings from the nation’s big three credit agencies.

Later the fun morphed into derivatives linked to mortgages, also sold with AAA ratings, again courtesy of the big three credit agencies, which profited handsomely off the whole arrangement.

Anyone surprised to learn that nothing has changed? Under the current system, credit agencies continue to be paid by the Wall Street firms whose products they are rating.

If an agency declines to give a particular product its seal of approval, the issuer can simply take its business – and its fees – elsewhere.

One of the big three, Standard & Poor’s Ratings Services, has been sued for fraud by the U.S. Justice Department for purposely understating the risks of securities in the buildup to the 2008 financial meltdown.

S&P has denied wrongdoing.

OK. Maybe it was an honest mistake. Maybe the credit agencies thought they had a handle on the whole mortgage derivative thing, but lacked the ability to do the proper analysis.

But maybe not: An email obtained by investigators in the S&P fraud suit said: “Let’s hope we are all wealthy and retired by the time this house of cards falters.”

Those mortgage-backed securities turned out to be toxic, and the fallout from that house of cards almost sent the world into another Great Depression.

That being the case, it amazes us that it’s still business as usual for the big credit rating agencies.

Legislation sponsored by two U.S. senators, Minnesota Democrat Al Franken and Mississippi Republican Roger Wicker, required action if a study found conflict of interest in the existing credit agency system.

Big surprise: That study, released in December 2012, concluded that the potential for conflicts remains.

But where is the outrage? Without substantial public support, Franken could well be on the losing end of an effort to get real reform.

Franken and Wicker have a simple plan to remove the built-in conflict of interest in the system.

A commission, appointed by the Securities and Exchange Commission, would essentially serve as matchmaker, pairing up credit agencies and businesses that want to sell structured financial investments such as mortgage-backed securities.

The credit agencies would still be paid, but banks could no longer shop around to find the best rating for a financial product.

“Investors are always going to have to rely on these ratings,” Franken said. “A pension manager making investments for the pension funds of volunteer firefighters in Kandiyohi County in central Minnesota simply doesn’t have the resources to do his or her own complex credit risk analysis.”

Exactly. Under the current system, Main Street is forced to trust Wall Street and the big credit rating agencies.

Having lived through the financial meltdown of 2008, forgive us if our trust level isn’t real high.

All eyes should now be on new SEC Chair Mary Jo White. If real reform doesn’t happen soon, there should be hell to pay.