Subscribe Subscribe   Find us on Twitter Follow POL on Twitter  



Government's Entanglement with Credit Ratings

| No Comments

The biggest credit rating agencies lost credibility in recent years after doling out top ratings to securities backed by mortgage pools that later proved to be very troubled. Dodd-Frank responded by changing the regulatory framework for credit rating agencies. Most importantly, it ordered the elimination of government mandates to rely on ratings produced by the handful of government-sanctioned credit rating agencies. This change reminds investors that they--not the government--are responsible for deciding whether credit rating agencies are doing a good job.

Unfortunately, other parts of Dodd-Frank could have the opposite effect--further lulling investors into complacency. One of the most troubling provisions was the subject of a recently released Securities and Exchange Commission staff study. The study considered the merits of establishing a quasi-governmental board charged with selecting a credit rating agency to rate each asset-backed security and with grading credit rating agencies' performance.

To its credit, the SEC staff highlighted many of the potential problems with such an approach, including the possibility that it "could lead investors to believe that these ratings are government-sanctioned and encourage them to forego additional due diligence." The staff also noted the difficulties the board would face in objectively assessing the accuracy of ratings. These and the staff's numerous other concerns should be sufficient to overcome Dodd-Frank's urging that the SEC establish a new bureaucracy to manage the credit rating process.

Leave a comment

Once submitted, the comment will first be reviewed by our editors and is not guaranteed to be published. Point of Law editors reserve the right to edit, delete, move, or mark as spam any and all comments. They also have the right to block access to any one or group from commenting or from the entire blog. A comment which does not add to the conversation, runs of on an inappropriate tangent, or kills the conversation may be edited, moved, or deleted.

The views and opinions of those providing comments are those of the author of the comment alone, and even if allowed onto the site do not reflect the opinions of Point of Law bloggers or the Manhattan Institute for Policy Research or any employee thereof. Comments submitted to Point of Law are the sole responsibility of their authors, and the author will take full responsibility for the comment, including any asserted liability for defamation or any other cause of action, and neither the Manhattan Institute nor its insurance carriers will assume responsibility for the comment merely because the Institute has provided the forum for its posting.

Related Entries:



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.