Credit Rating Agencies and the Credit Crisis: How the “Issuer Pays” Conflict Contributed and What Regulators Might Do About It
All good–or at least interesting–stories have a villain, and as the Credit Crisis started to unfold in 2007, credit rating agencies (“CRAs”) emerged as obvious targets for fingerpointing by regulators, scholars, and commentators alike. In short, many observers have accused the agencies of doing a poor job assessing the risks inherent in securities backed by subprime mortgages. These securities–particularly residential mortgage-backed securities (“RMBS”) and collateralized debt obligations (“CDOs”) backed by subprime mortgages–have been at the center of the Credit Crisis, and many assert that these instruments would not have been as marketable without the CRAs’ perceived seal of approval. Why did the agencies perform so poorly? There are likely many contributing factors, but a popular focal point has been the conflict of interest embedded in the CRAs’ issuer pays business model. Indeed, several features of the structured finance ratings market, including the growth in structured finance products, the concentration of the CRAs’ customer base for these securities, and the ratings process itself, suggest that the conflict may have been exacerbated. This Note explores these characteristics and argues that the current regulatory regime, with its emphasis on disclosure, is likely insufficient to protect against a similar problem in the future.
Volume 2015 | Issue 2
A selection from our current issue.
- The Data Security Governance Conundrum: Practical Solutions and Best Practices for the Boardroom and the C-Suite
by Thad A. Davis, Michael Li-Ming Wong & Nicola M. Paterson
- Law in Regression? Impacts of Quantitative Research on Law and Regulation
by David C. Donald
- Preparing Financial Regulation for the Second Machine Age: The Need for Oversight of Digital Intermediaries in the Futures Markets
by Gregory Scopino
- Congress Killed the Radio Star: Revisiting the Terrestrial Radio Sound Recording Exemption in 2015
by Melanie Jolson
- A Safe Harbor from Spoliation Sanctions: Can an Amended Federal Rule of Civil Procedure 37(e) Protect Producing Parties?
by Alexander Nourse Gross
- Death and Live Feeds: Privacy Protection in Fiduciary Access to Digital Assets
by Jeehyeon (Jenny) Lee