| Title | How to Reform the Credit-Rating Process to Support a Sustainable Revival of Private-Label Securitization |
|---|---|
| ID_Doc | 77533 |
| Authors | Herring, R; Kane, EJ |
| Title | How to Reform the Credit-Rating Process to Support a Sustainable Revival of Private-Label Securitization |
| Year | 2012 |
| Published | Quarterly Journal Of Finance, 2, 1 |
| Abstract | US product-liability laws unwisely treat credit-rating organizations (CROs) as if they produce opinions rather than empirically-based economic research. In principle, trained professionals gather time-varying information ("financial news") and analyze it statistically to reduce it to a single dimension, allegedly for the benefit of investors, which, in turn, enables issuers to finance themselves at lower cost. In practice, the issuer-pays business model currently used for funding the production and distribution of ratings information creates an incentive to favor high-volume issuers by over-rating private-label securitizations. While the Dodd-Frank Act intensifies SEC oversight of CRO activity, the SEC has a history of being captured by regulatory clients. We argue that the fundamental solution is to create accountability in the ratings process so that private label securitizations can play a constructive role in the provision of credit and we go on to offer some conjectures about how this could be done. |
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