I have said repeatedly that the current financial reform on offer in the Senate would give regulators a wider menu of options, but would not fundamentally change the way Wall Street does its business. The death of the Brown-Kaufman amendment on bank size aside, there are still a number of ways to get at this fundamental change, at least in steps if not all at once. The Merkley-Levin amendment banning proprietary trading and giving teeth to the Volcker rule becomes the top priority for bank reformers, if not “coalitions” like Americans for Financial Reform seeking just to maintain the status quo in the Dodd draft without disrupting the mindsets or pocketbooks of financial elites. That amendment has 17 Democratic co-sponsors and claims the support of Banking Committee Chair Chris Dodd.

But another amendment that would at least fix one corner of our financial system, or at least end the “pay to play” practice of favor-trading amongst elites that has come to symbolize that system, is the amendment by Al Franken to reform the credit rating agencies. Franken’s amendment, which would task a regulatory body inside the SEC with selecting who determines the initial rating for securities instead of the current “issuer pays” model, has 12 total sponsors, including Republican Roger Wicker (R-MS). Franken sent to his supporters an action email on this amendment, and he frames the case very well:

So right now Wall Street banks can influence Credit Rating Agencies to give their financial products good grades. It’s legal, but it’s also insane, and downright unethical.

I am trying to attach an amendment to the Wall Street reform bill being debated in the Senate that aims put an end to (at least this kind) of fraud that costs retirees and everyday investors billions.

Kids don’t get to buy grades in school, so banks shouldn’t be able to buy theirs on Wall Street. It’s only fair.

This comes as Moody’s, one of the three companies who hold an effective triopoly on the rating agency business, is in hot water with the SEC over its conduct:

Late on Friday, rating agency Moody’s disclosed in its quarterly 10-Q filing that it had received a Wells Notice from the SEC.

(A Wells Notice is a notification of intent to recommend that the US government pursue enforcement proceedings, and is sent by regulators to a company or a person)

That notice, which the SEC issued in March 2010, is linked to the investigation by one Sam Jones, then of the FT Alphaville parish, into the company’s modelling errors on CPDOs.

Jones’ investigation found that Moody’s had wrongly bestowed triple-A ratings on billions of dollars of so-called constant proportion debt obligations.

This is what we’ve seen with countless stories of rating agency abuse during the financial crisis. Whether through direct pressure or the promise of more business, companies like Moody’s sacrificed accuracy in their modeling and basically rubber-stamped securities with triple-A ratings. This is precisely the abuse that Franken’s amendment would stop, and the result of more honest and transparent rating practices would perhaps be investors less willing to gamble on risky securities that could easily go sour.

These are amendments worth fighting for; it would be nice to see some progressives actually understand the connections of financial reform to a fairer economy and take up the fight.