Ratings Failure: The Need for a Consumer Protection Agenda in Rating Agency Regulation

Banking and Financial Services Policy Report, 2009

Brooklyn Law School, Legal Studies Paper No. 154

17 Pages Posted: 13 Jun 2009  

David J. Reiss

Brooklyn Law School

Date Written: June, 12 2009

Abstract

As the credit crisis unfolds, rating agencies have been properly identified as playing a central role in causing the crisis and misleading investors. What has been forgotten in this acrimonious environment is that in their quest to increase the market for their services, rating agencies also took positions that were particularly bad for many homeowners.

This article first reviews the explosive growth of the subprime mortgage market. It then discusses the ways in which the leading rating agencies, Standard & Poor's, Moody's and Fitch, acted as government-approved gatekeepers to the financial markets and contributed to the rapid expansion of the subprime market. These three entities profited from the growth of that market and suppressed efforts by states to crack down on the predatory lending practices that had become endemic to it.

The article concludes that ongoing efforts to reform the regulation of the rating agencies fail to address their systemic bias against the public interest. As their regulators seek to tighten oversight of these important players in the financial markets, it is important to ensure that future regulation provides additional protection for consumers as well.

Keywords: rating agencies, subprime, securitization, consumer protection, predatory lending, cdo, mortgage-backed securities, mbs, housing finance

Suggested Citation

Reiss, David J., Ratings Failure: The Need for a Consumer Protection Agenda in Rating Agency Regulation (June, 12 2009). Banking and Financial Services Policy Report, 2009; Brooklyn Law School, Legal Studies Paper No. 154. Available at SSRN: https://ssrn.com/abstract=1418549

David J. Reiss (Contact Author)

Brooklyn Law School ( email )

250 Joralemon Street
Brooklyn, NY 11201
United States

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