Chapman Law Review
The history of rating agency reform has not been inspiring. Until recently, it seemed stuck in an ever-repeating cycle of futility. A crisis would spur calls for reform, hearings would be conducted, the SEC would issue proposals and requests for comments, and ultimately, nothing would happen - until the next crisis, when the cycle would begin again. The Enron debacle, in which the rating agencies rated Enron’s debt investment grade until four days before Enron declared bankruptcy, did spur some action, including federal legislation and SEC regulations. Whatever else may be said about the Enron-spurred action, it failed to prevent rating agencies from rating low-quality securities as AAA. This misrating was an important cause of the recent financial crisis. In response to the crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed. Dodd-Frank includes some reforms to the rating agency regulatory regime. In this article, I argue that while Dodd-Frank’s rating agency reforms are not bad, they also are not particularly good. They do not sufficiently address the core reasons why rating agencies gave such inflated ratings to subprime securities or why the agencies so grievously misrated other instruments, including Enron debt and debt involved in the Asian flu. I then explain the reasons for this conclusion, and make some suggestions for better rating agency reform.
Claire Hill, Limits of Dodd-Frank's Rating Agency Reform, 15 Chap. L. Rev. 133 (2011), available at http://scholarship.law.umn.edu/faculty_articles/76.