Ratings Reform: The Good, The Bad, and The Ugly
John C. Coffee Jr.
Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences
Columbia Law and Economics Working Paper No. 375
ECGI - Law Working Paper No. 162/2010
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.
Number of Pages in PDF File: 64
Keywords: credit rating, Dodd-Frank Act, public good, European Commission
JEL Classification: G18, G28, G29, G38, K22
Date posted: July 31, 2010 ; Last revised: September 13, 2010