November 20, 2012
“Downgrading Rating Agency Reform”
This is the title of Jeffrey Mann’s forthcoming article. He writes
The most important part of the Act remains the most unresolved: the SEC’s mandate to design an alternative rating industry business model to address the conflicts of interest created by debt issuers’ selecting and paying their rating agency gatekeepers. Prospects for the creation of an independent commission to select rating agencies for structured finance products have foundered due to the challenges of crafting benchmarks for rating agency performance to use in selecting rating agencies and holding them accountable. The use of any performance-based standard to select or evaluate rating agencies risks fueling herding effects as rating agencies may shape their methodologies to game the system rather than to enhance accurate and timely assessments of credit risk. (page 5, emphasis added, footnotes omitted)
How to regulate the rating of structured finance products remains the key issue in rating agency reform. It is a much knottier issue than the rating of corporate or municipal debt because rating agencies have historically played a key role in designing these securities so that a given pool was rated investment grade to the greatest extent possible.
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