Lewis & Clark Law Review
First Page
1489
Abstract
In 2007, the economy crashed because of credit rating agency misconduct. Through the early 2000s, credit raters’ reckless pursuit of profits facilitated the enormous real estate and structured finance bubble that eventually burst in 2007. This Article examines the ratings industry and its institutions, their role in the crash, the regulation that led to their dominance in the markets, how that regulation changed in the wake of the economic crisis, and how they can be held liable today for present and future misconduct.
Section I describes what credit rating agencies (CRAs) are and what they do. Understanding the function of these institutions is critical to understanding how they operated before and after the crash, and why they should not be shielded from liability. Section II explains the role of the rating agencies in the financial crash of 2007, and how falsely high ratings for very risky instruments helped grow the immense real estate and credit bubble. Section III explains the history of credit rating regulation before the crisis and establishes how the agencies came to occupy such an enormous and important role in financial markets. Section IV details the reactive legislation that came after the financial crisis and explains its effect—or lack thereof—on ratings regulation. Substan- tial regulatory reliance persists in spite of the Act’s overt goals, which means that CRAs still occupy a powerful quasi-governmental position in the economy. This Section also adds a current analysis (as of January 2020) of the Office of Credit Ratings, which is a subdivision of the SEC created by the Dodd-Frank Act. Section V outlines theories of liability for credit raters. If oversight of the rating agencies continues to be ineffective, then litigation on statutory, tort, or criminal grounds must be employed to deter misconduct and market manipu- lation and to punish bad actors. Increasing CRA liability will more effectively combat the conflicts of interest that persist in the industry by deterring risky and fraudulent conduct, and by encouraging due diligence and substantial investment in accurate economic models.
Recommended Citation
Colin Bradshaw,
Credit Rating Agencies: Regulation and Liability,
24
Lewis & Clark L. Rev.
1489
(2020).
Available at:
https://lawcommons.lclark.edu/lclr/vol24/iss4/9