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Rating Agencies Under Fire- Again

The New Republic has posted an article by Alex Klein this week on failed (so far) efforts to enact a more rational regulatory framework for the rating agencies, which are in the news again as the threat of a downgrade for America’s AAA credit rating looms.

I shared with Alex my surprise that the rating agencies continue to escape meaningful reform to address the failures that contributed to the 2009 financial crisis, and to evade the responsibility for future RMBS opinions that would have been conferred by “expert status.” 

Under the Dodd-Frank financial reform bill, which marked its 1st anniversary earlier this month, the agencies were required to accept liability for their ratings of asset-backed securities, including mortgage bonds.  As part of Dodd-Frank implementation, the SEC required bond issuers to include rating agency opinions in offering documents.  But after the rating agencies refused to accept expert status and effectively froze the market, the SEC extended the implementation deadline indefinitely.

I’ve commented before on the SEC’s failure to bring about meaningful change in the way the rating agencies operate.  Don’t get me wrong – I respect some of the agencies and many of the professionals who work for them.  But the lack of clear, transparent standards for how mortgage-backed bonds should be rated is one cause of the investor uncertainty slowing the recuperation of the RMBS market – and creation of uniform standards and imposition of accountability can only be done through regulatory action.