Coffee Calls for Accountability from Credit Agencies

Winter 2010

In testimony before the Senate Banking Committee in August, Professor
John C. Coffee Jr. warned legislators that credit-rating agencies must be held more accountable for their actions in order to avoid a repeat of the ongoing financial crisis.

“The credit-rating agencies today do not face any meaningful risk of liability,” said Coffee, the Adolf A. Berle Professor of Law.

Companies such as Moody’s, Standard & Poor’s, and Fitch Ratings came under harsh criticism for assigning their highest ratings to bundles of mortgage-backed securities, many of which were built around subprime loans that went into default.

Part of the problem, noted Coffee, is that most of the revenue for the rating agencies comes from the issuers of these securities. Although that business model is likely to remain intact, Coffee argued that changes are needed or there will be a “persistence of the status quo, dysfunctional and perverse as it is.

“Ultimately, unless the users of credit ratings believe that ratings are based on
real facts,” Coffee said, “the credibility of ratings, particularly in the field of structured finance, will remain tarnished, and private housing finance in the U.S. will remain starved and underfunded because it will be denied access to the broader
capital markets.”

In the weeks following his testimony, Coffee joined the new Credit Rating Agency Task Force, which was established by the Bipartisan Policy Center. The coalition will serve as a technical and creative resource for members of the House of Representatives’ Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises as they work to reform credit-rating agencies.