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Unpublished Paper
A Pattern of Unaccountability: Rating Agency Liability, The Dodd-Frank Act, and a Financial Crisis That Could Have Been Prevented
ExpressO (2011)
  • Stephen P Alicanti

By opining on the credit quality of structured debt products, credit rating agencies guide investment decisions and facilitate the debt capital markets. In the years leading up to the financial crisis of 2007, loans were commonly issued to individuals with poor credit histories and insufficient income. After those loans were originated, investment banks packaged them into securitized debt products and sold sections (tranches) to investors. Many of those products received credit rating agencies’ highest endorsement of creditworthiness. Despite their high ratings, those products failed during the financial crisis and devastated individual investors, investment banks, and insurance companies. The financial shockwaves spanned the globe.

In the wake of one of the worst financial crises in our nation’s history, credit rating agencies have been subjected to scathing allegations. Some suggest that credit rating agencies lacked qualified personnel to properly scrutinize the massive quantity of loans. Perhaps credit models were inadequate. Others suggest a more nefarious intentional disregard of credit quality as part of a collusive effort with investment banks. Even if the worst accusations are true, investors generally have had little recourse against credit rating agencies. The investing public demands that credit rating agencies be held accountable.

This article examines past civil lawsuits against credit rating agencies, the obstacles that plaintiffs frequently encounter, and how the Dodd-Frank Act removes many of those impediments. Credit rating agencies may argue that certain sections of the Dodd-Frank Act violate the First Amendment because of its regulation on the agencies’ “free speech.” At the time of this writing, the Supreme Court has not addressed this issue. Throughout my analysis of the Dodd-Frank Act, I argue that it should be upheld and that the judiciary should force rating agencies to defend the quality of their work instead of hiding behind the First Amendment.

Additionally, I propose oversight reforms in coordination with the Dodd-Frank Act’s proposed studies. Specifically, I argue for immediately segregating rating and consulting functions, maintaining the issuer-pay model, and creating an independent analyst organization. I conduct a substantial portion of my analysis and recommendations from the unique perspective of the credit rating industry’s comparability with the audit industry. In doing so, I consider how the Sarbanes-Oxley Act of 2002 identified problematic issues within the credit rating industry, but failed to act on them—effectively missing a chance to prevent the recent credit crisis.

Publication Date
August 8, 2011
Citation Information
Stephen P Alicanti. "A Pattern of Unaccountability: Rating Agency Liability, The Dodd-Frank Act, and a Financial Crisis That Could Have Been Prevented" ExpressO (2011)
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