Document Type


Publication Date


Publication Title

Administrative Law Review


credit rating organizations, CROs, financial regulation


In light of the present economic crisis and their role in it, the world seems suddenly keen to know more about the handful of private corporations--variously known as bond rating agencies, credit rating agencies, credit rating organizations (CROs), or the like--that rate the creditworthiness of corporate and government debt securities. By most accounts, these companies hold extensive sway in public capital markets, and for about thirty years, a few of them have enjoyed literally de jure delegation of federal regulatory oversight over much of the U.S. financial sector. With that power their ratings have value regardless of their accuracy, and they have used this power to earn substantial profits. The regulatory use of credit ratings is particularly troubling because the CROs have been implicated in some of that sector's worst problems and, by most accounts, were intimately tied up in the present mess. The purpose of this Article is not to argue, as others have done and will do in the future, that the CROs have lacked oversight for too long or that their behavior has been suboptimal. This Article also does not urge any particular policy tweak to solve the industry's problems, although it is clear that a necessary (but not sufficient) step is removing regulatory reliance on the CROs. The Article will instead assert two more-general propositions. First, the industry in its current posture cannot be meaningfully regulated, despite the near-universal agreement that if it is to persist in its current quasi-governmental role, it must be regulated. Second, the industry's performance is likely to remain seriously disappointing under any conceivable change in policy or in an industry structure that still contemplates a major private role in formal assessment of credit risk. This will be shown in several ways. This Article will suggest reasons not to be too sanguine about any of the short-term regulatory solutions available at the moment, including legal and voluntary constraints currently in place and those that are currently pending before policymakers. The regulatory efforts that have recently been brought to bear on CROs are mainly structural tweaks and disclosure requirements meant to curtail conflicts of interest and increase CRO competition, which will not work. Controls were already in place to control conflicts and provide disclosure prior to the current economic catastrophe, and they have been shown to have been of no use. Likewise, while increased competition conceivably could improve the price competitiveness of ratings services, we will argue that it is unlikely to improve their quality. Indeed, all proposals so far suggested by academics and others, as well as a few developed in this Article, are fairly problematic, especially those that countenance some important continuing regulatory role for private, profit-making risk raters.