In this pod cast, BLS Professor of Law David J. Reiss discusses his latest paper Ratings Failure: The Need for a Consumer Protection Agenda in Rating Agency Regulation. In the paper, Prof. Reiss describes how, as the credit crisis unfolded, rating agencies were properly identified as playing a central role in causing the crisis and misleading investors and that they took positions that were particularly bad for many homeowners.
His article first reviews the explosive growth of the subprime mortgage market. It then discusses the ways in which the leading rating agencies, Standard & Poor's, Moody's and Fitch, acted as government-approved gatekeepers to the financial markets and contributed to the rapid expansion of the subprime market. These three entities profited from the growth of that market and suppressed efforts by states to crack down on the predatory lending practices that had become endemic to it.
The article concludes that ongoing efforts to reform the regulation of the rating agencies fail to address their systemic bias against the public interest. As their regulators seek to tighten oversight of these important players in the financial markets, it is important to ensure that future regulation provides additional protection for consumers as well.
For more of Prof. Reiss' scholarship, see his Selected Works page.