WASHINGTON – Today, Oregon’s Senator Jeff Merkley led a group of 11 Senators in calling on the Securities and Exchange Commission (SEC) to get the job done on key, unfinished reforms that are essential to preventing another financial crisis.
In a letter to SEC Chair Mary Jo White, the Senators pushed for the SEC to finish four overdue reforms that are critical to making asset-backed securities markets safer for investors and the economy and helping to prevent another financial crisis:
- Credit rating agency reforms;
- Prohibitions on financial firms betting against the securities they package;
- Improved disclosure and oversight of the asset-backed securities market; and
- A joint rulemaking with other agencies to limit bank compensation structures that incentivize risk.
Toxic, asset-backed securities were at the heart of the 2008 market meltdown. Banks packaged bundles of subprime mortgage loans into securities to sell to investors, but paid little attention to their quality. They paid credit ratings agencies to rate these securities as AAA despite their high risk, provided investors with inadequate and often misleading disclosures, and structured pay packages for their traders and executives that incentivized them to keep the “securitization train” going despite the risks to the investors – or to the bank. As some firms began to realize the dangers, they went so far as to create asset-backed securities designed to fail and sold them to unsuspecting investors and then bet on that very failure.
The four reforms pushed for by the Senators, which address some of the worst abuses, were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act four years ago, but remain unfinished by the SEC. With these markets unreformed, investor confidence remains low, and the economic benefits of asset-backed securities markets remain unrealized. In June, Treasury Secretary Lew went so far as to highlight the lack of recovery in the asset-backed securities markets as affecting families’ ability to access housing credit.
“As you are well aware, poorly underwritten and weakly regulated asset-backed securities were at the heart of the 2008 financial crisis and the recession that followed,” the Senators wrote. “[…] Securitization also gave rise to some of the most egregious conflicts of interest when those underwriting and packaging the securities were, in fact, betting on them to fail and collecting billions of dollars from the clients they had convinced to buy the securities.”
“Four years after the passage of the Dodd-Frank Act, it is long past time for these core reforms to be finished.”
In addition to Senator Merkley, the letter was signed by Senators Al Franken (D-MN), Carl Levin (D-MI), Ed Markey (D-MA), Bernie Sanders (I-VT), Elizabeth Warren (D-MA), Barbara Boxer (D-CA), Dianne Feinstein (D-CA), Dick Durbin (D-IL), Mazie Hirono (D-HI), and Tammy Baldwin (D-WI).
The full text of the signed letter can be viewed here.