Ratings Reform: The Good, The Bad, and The Ugly

64 Pages Posted: 31 Jul 2010 Last revised: 22 Jan 2019

See all articles by John C. Coffee

John C. Coffee

Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences

Date Written: September 2010


Both in Europe and in the United States, major steps have been taken to render credit rating agencies more accountable. But do these steps address the causes of the debacle in the subprime mortgage market that triggered the 2008-2009 crisis? Surveying the latest evidence on how and why credit ratings became inflated, this paper argues that conflicts of interest cannot be purged on a piecemeal basis. The fundamental choice is between (1) implementing a “subscriber pays” model that compels rating agencies to compete for the favor of investors, not issuers, and (2) seeking to deemphasize or eliminate the role of credit ratings to reduce the licensing power of rating agencies. Although it strongly favors the first option over the second, it also recognizes that the “public goods” nature of ratings makes it unlikely that a “subscriber pays” system will develop on its own without regulatory interventions. Thus, it considers how best to encourage the development of a modified system under which the investor would choose and the issuer/deal arranger would pay for the initial rating on structured finance transactions.

Keywords: credit rating, Dodd-Frank Act, public good, European Commission

JEL Classification: G18, G28, G29, G38, K22

Suggested Citation

Coffee, John C., Ratings Reform: The Good, The Bad, and The Ugly (September 2010). Columbia Law and Economics Working Paper No. 375, ECGI - Law Working Paper No. 162/2010, Available at SSRN: https://ssrn.com/abstract=1650802

John C. Coffee (Contact Author)

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American Academy of Arts & Sciences

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