Research Highlights

Professor Lawrence White Testifies Before Congress on Ratings Agencies Post-Dodd-Frank

On July 27, 2011, Professor Lawrence White testified before the Subcommittee on Oversight and Investigations at their hearing on “Oversight of the Credit Rating Agencies Post-Dodd-Frank.”

Professor White outlined the reasons why the three large US credit rating agencies – Moody’s, Standard & Poor’s and Fitch – became so powerful in the decades leading up to the financial crisis, explaining that earlier regulations had mandated that banks and other institutions use the rating agencies to determine the creditworthiness of bonds. Professor White explained that there are many other ways to determine creditworthiness.

“The urge to ‘do something’ in the wake of the mistakes of the major credit rating agencies during the middle years of this decade is understandable,” Professor White stated. “Nevertheless the dangers of Sec. 932 of Dodd-Frank are substantial.” He explained that the regulations would ultimately “discourage entry and innovation in new ways of gathering and assessing information,” and asserted, “Further, it is far from clear that the provisions will actually achieve the goal of improving ratings.”

Professor White declared, “There is a better route, which is embodied in Secs. 939 and 939A of the Act: eliminate all regulatory reliance on ratings by US financial regulatory agencies – eliminate the force of law that has been accorded to these third-party judgments. The institutional participants in the bond market could then more readily (with appropriate oversight by financial regulators) make use of a wider set of providers of information, and the bond information market would be opened to new ideas and new entry in a way that has not been possible for 75 years.” Read Professor White's testimony.