Below Investment Grade and above the Law: A Past, Present and Future Look at the Accountability of Credit Rating Agencies

By Cane, Marilyn Blumberg; Shamir, Adam et al. | Fordham Journal of Corporate & Financial Law, October 1, 2012 | Go to article overview

Below Investment Grade and above the Law: A Past, Present and Future Look at the Accountability of Credit Rating Agencies


Cane, Marilyn Blumberg, Shamir, Adam, Jodar, Tomas, Fordham Journal of Corporate & Financial Law


ABSTRACT

"Below Investment Grade and Above the Law: A Past, Present and Future Look at the Accountability of Credit Rating Agencies" by Professor Marilyn Blumberg Cane, co-authored with Adam Shamir and Tomas Jodar is a timely and comprehensive Article focusing on the responsibility, and lack thereof, of credit rating agencies ("CRAs"). The Article is titled "below investment grade" due to the shoddy performance of the CRAs in light of their key role in the financial crisis of 2007-08. It is also titled "above the law" because of the CRAs' lack of accountability due to regulatory sleight of hand and the CRAs' almost completely successful defense against liability to bondholders through the invocation of the freedom of speech under the First Amendment.

This Article covers the evolution of the credit rating industry, in particular, the noteworthy shift from the purchaser-subscriber to issuer-pays model. It then describes the history of SEC CRA regulatory measures, most notably the adoption of SEC Rule 436(g), adopted in 1982, which specifically eliminated liability for the big CRAs (Moody's, Standard & Poor's, Fitch's and Duff and Phelps) as "experts" under Sections 7 and 11 of the Securities Act of 1933. This Article then covers the Credit Rating Agency Reform Act of 2006 and the adoption of SEC Rule 17g-5, in so far as they attempted to control conflicts of interest within CRAs. This Article next turns to the freedom of speech as a defense effectively used by CRAs, although the United States Supreme Court has yet to address this issue directly. The thrust of the CRAs' argument is that their ratings are simply their expression of their opinion, akin to a review of a restaurant or editorial column.4 There is much irony in this as many regulated financial players, such as banks and insurance companies, are required to comply with governmental rules that mandate them to invest in "investment grade securities," a "blessing" conferred only by the privately owned CRAs.

Next, this Article dissects provisions regarding CRAs in the DoddFrank Wall Street Reform and Consumer Protection Act of 2010, which among many other things, reads "Rule 436(g), promulgated by the Securities and Exchange Commission under the Securities Act of 1933 shall have no force or effect."5 As the reader will see, this provision has not been enforced by the SEC, whereas in what could only be seen as a game of hard ball, the CRAs won notwithstanding the Act. For completeness, this Article then turns to the European approach of CRA regulation, including the creation of the European Securities and Markets Authority in January 2011.6

This Article concludes by suggesting, at a minimum, that CRAs be subject to accountability, and that some formal, financially neutral body conduct a periodic assessment rating the performance of the CRAs.

INTRODUCTION

"There are two superpowers in the world today in my opinion. There's the United States and there's Moody's Bond Rating Service. The United States can destroy you by dropping bombs, and Moody's can destroy you by downgrading your bonds. And believe me, it's not clear sometimes who's more powerful," said journalist Thomas Friedman regarding the undeniable power of Credit Rating Agencies ("CRAs").7 In light of the August 5, 2011 downgrade of the United States' long-term federal debt by major credit rating agency Standard and Poor's, Mr. Friedman's words ring truer than ever.8

CRAs have not always enjoyed such a commanding status, and have evolved considerably to become the market-shaping giants they are today.9 Millions of investors across the world rely on rating agencies to help assess the creditworthiness of particular financial instruments.10 While these agencies perform a vital function for the financial community, many individuals, investors, and organizations heavily criticize the rating agencies, notably for their role in the 2007-2008 subprime mortgage crisis." CRAs have been blasted for their shoddy performance in rating various structured financial instruments, raising several questions regarding the accuracy of their ratings and the integrity of the process as a whole. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Below Investment Grade and above the Law: A Past, Present and Future Look at the Accountability of Credit Rating Agencies
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.