Hillary Clinton’s response to Bernie Sanders’ plan to aggressively break up the big banks responsible for the financial crisis is to suggest that he is naive.
“My plan also goes beyond the biggest banks to include the whole financial sector,” Clinton wrote in a New York Times op-ed in December. “My plan is more comprehensive,” she said at the first Democratic debate in October — and for that reason, “frankly, it’s tougher.”
But Clinton’s vision of financial reform neglects one part of the industry everyone agrees was an essential factor in the 2008 crisis: the credit ratings agencies, which assess the worthiness of Wall Street securities for investors.
Sanders’ plan, released last week, would no longer allow the companies that issue securities to pick which ratings agency they use — a simple but outrageous practice that creates an enormous conflict of interest and helps facilitate fraud.
The heart of Clinton’s pitch on Wall Street is that she recognizes all potential hazards. But there is not one word in her big reform plan about the ratings agencies.
The ludicrousness of the current system was brilliantly depicted in The Big Short, the Oscar-contending comedy about the financial collapse. In a pivotal scene, Melissa Leo (sporting comically large eyeglasses, above) plays an employee of Standard & Poor’s, one of the three biggest ratings agencies.
She explains to Steve Carell (as hedge fund manager Mark Baum) why S&P continues to give AAA ratings (connoting no risk of default) to mortgage-backed securities composed of junk loans: If they didn’t, the issuers would just go to their competitors, Moody’s and Fitch.
Investors use those ratings to make decisions about what bonds to buy. But because the banks that issue securities pay for the ratings, the ratings agencies have a significant financial incentive to grant high ratings in order to attract more business.