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Limits of Dodd-Frank's Rating Agency Reform

17 Pages Posted: 6 Sep 2011  

Claire A. Hill

University of Minnesota Law School

Date Written: February 2011

Abstract

The history of rating agency reform has not been inspiring. Until recently, it seemed stuck in an ever-repeating cycle of futility. A crisis would spur calls for reform, hearings would be conducted, the SEC would issue proposals and requests for comments, and ultimately, nothing would happen - until the next crisis, when the cycle would begin again. The Enron debacle, in which the rating agencies rated Enron’s debt investment grade until four days before Enron declared bankruptcy, did spur some action, including federal legislation and SEC regulations. Whatever else may be said about the Enron-spurred action, it failed to prevent rating agencies from rating low-quality securities as AAA. This misrating was an important cause of the recent financial crisis. In response to the crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed. Dodd-Frank includes some reforms to the rating agency regulatory regime. In this article, I argue that while Dodd-Frank’s rating agency reforms are not bad, they also are not particularly good. They do not sufficiently address the core reasons why rating agencies gave such inflated ratings to subprime securities or why the agencies so grievously misrated other instruments, including Enron debt and debt involved in the Asian flu. I then explain the reasons for this conclusion, and make some suggestions for better rating agency reform.

Keywords: rating agencies, Dodd-Frank, subprime securities

JEL Classification: G18, G24, K20, L13

Suggested Citation

Hill, Claire A., Limits of Dodd-Frank's Rating Agency Reform (February 2011). Chapman Law Review, Vol. 15, No. 1, p. 133, 2011; Minnesota Legal Studies Research Paper No. 11-37. Available at SSRN: https://ssrn.com/abstract=1922865

Claire Ariane Hill (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-624-6521 (Phone)

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