Post by Sapphire Capital on Oct 3, 2008 11:49:57 GMT 4
Rating Risk after the Subprime Mortgage Crisis: A User Fee Approach for Rating Agency Accountability
Jeffrey Manns
Latham & Watkins
North Carolina Law Review, Forthcoming
Abstract:
This article argues that rating agencies succumbed to temptations to compromise their role as screeners of credit risk due to an absence of accountability, which paved the way for the subprime mortgage crisis. It will suggest how enlisting purchasers of debt issues, the primary beneficiaries of ratings, as self-interested monitors of rating agencies may help to heighten rating agency accountability in the future. Interconnections of interests between rating agencies and their clients, issuers of debt, fostered a system of lax ratings that provided false assurances on the risk exposure of subprime debt instruments, such as residential mortgage-backed securities and collateralized debt obligations. Debt purchasers suffered significant losses in part due to their reliance on inaccurate ratings, yet lacked any means to hold rating agencies accountable. For this reason, the article suggests how creditors 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. It will show how subjecting rating agencies to certification and mandatory reporting duties to creditors and limiting capped liability exposure to cases of gross negligence will create incentives for rating agency compliance, yet pose a manageable burden.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1262049_code468747.pdf?abstractid=1199622&mirid=2
Jeffrey Manns
Latham & Watkins
North Carolina Law Review, Forthcoming
Abstract:
This article argues that rating agencies succumbed to temptations to compromise their role as screeners of credit risk due to an absence of accountability, which paved the way for the subprime mortgage crisis. It will suggest how enlisting purchasers of debt issues, the primary beneficiaries of ratings, as self-interested monitors of rating agencies may help to heighten rating agency accountability in the future. Interconnections of interests between rating agencies and their clients, issuers of debt, fostered a system of lax ratings that provided false assurances on the risk exposure of subprime debt instruments, such as residential mortgage-backed securities and collateralized debt obligations. Debt purchasers suffered significant losses in part due to their reliance on inaccurate ratings, yet lacked any means to hold rating agencies accountable. For this reason, the article suggests how creditors 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. It will show how subjecting rating agencies to certification and mandatory reporting duties to creditors and limiting capped liability exposure to cases of gross negligence will create incentives for rating agency compliance, yet pose a manageable burden.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1262049_code468747.pdf?abstractid=1199622&mirid=2