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Rating Risk after the Subprime Mortgage Crisis: A User Fee Approach for Rating Agency Accountability

80 Pages Posted: 29 Aug 2008 Last revised: 21 Aug 2009

Jeffrey Manns

George Washington University Law School

Date Written: August 3, 2008

Abstract

This article argues that an absence of accountability and interconnections of interest between rating agencies and their debt issuer clients fostered a system of lax ratings that provided false assurances on the risk exposure of subprime mortgage-backed securities and collateralized debt obligations. It lays out an innovative, yet practical pathway for reform by suggesting how debt purchasers, the primary beneficiaries of ratings, may bear both the burdens and benefits of rating agency accountability by financing ratings through an SEC-administered user fee system in exchange for enforceable rights. The SEC user fee system would require rating agencies both to bid for the right to rate debt issues and to assume certification and mandatory reporting duties to creditors. The article suggests how empowering creditors to seek capped damages against rating agencies for gross negligence, while reserving enforcement discretion with the SEC to pursue negligence actions, would create incentives for rating agency compliance, yet pose a manageable burden.

Keywords: Rating Agencies, Gatekeepers

JEL Classification: K10, K22

Suggested Citation

Manns, Jeffrey, Rating Risk after the Subprime Mortgage Crisis: A User Fee Approach for Rating Agency Accountability (August 3, 2008). North Carolina Law Review, Vol. 87, p. 1011, 2009. Available at SSRN: https://ssrn.com/abstract=1199622

Jeffrey David Manns (Contact Author)

George Washington University Law School ( email )

2000 H Street, N.W.
Washington, DC 20052
United States

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