Table Of Contenti
Regulation and the Credit
Rating Agencies
This book examines the transgressions of the credit rating agencies before,
during and after the recent financial crisis. It proposes that by restricting the
agencies’ ability to offer ancillary services there stands the opportunity to limit,
in an achievable and practical manner, the potentially negative effect that the Big
Three rating agencies – Standard & Poor’s, Moody’s and Fitch – may have upon
the financial sector and society moreover. The book contains an extensive and
in-d epth discussion about how the agencies ascended to their current position,
why they were able to do so and ultimately their behaviour once their position
was cemented.
This work offers a new framework for the reader to follow, suggesting that
investors, issuers and the state have a ‘desired’ version of the agencies in their
thinking and operate upon that basis when, in fact, those imagined agencies do
not exist, as demonstrated by the ‘actual’ conduct of the agencies. The book pri-
marily aims to uncover this divergence and reveal the ‘real’ credit rating agencies,
and then on that basis propose a real and potentially achievable reform to limit the
negative effects that result from poor performance in this industry. It addresses
the topics with regard to financial regulation and the financial crisis, and will be
of interest to legal scholars interested in the intersection between business and
the law as well as researchers, academics, policymakers, industry and professional
associations and students in the fields of corporate law, banking and finance law,
financial regulation, corporate governance and corporate finance.
Daniel Cash is a lecturer in law at Aston University, UK.
ii
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Regulation and the Credit Rating Agencies
Restraining Ancillary Services
Daniel Cash
ii i
Regulation and the Credit
Rating Agencies
Restraining Ancillary Services
Daniel Cash
iv
First published 2019
by Routledge
711 Third Avenue, New York, NY 10017
and by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2019 Daniel Cash
The right of Daniel Cash to be identified as author of this work has been asserted by him
in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised
in any form or by any electronic, mechanical or other means, now known or
hereafter invented, including photocopying and recording or in any information
storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks
and are used only for identification and explanation without intent to infringe.
Library of Congress Cataloging- in- Publication Data
Names: Cash, Daniel (Law teacher)
Title: Regulation and the credit rating agencies :
restraining ancillary services / Daniel Cash.
Description: Abingdon, Oxon ; New York, NY : Routledge, 2018. |
Series: Routledge research in corporate law | Includes index. |
Based on author’s thesis (doctoral – Durham University, 2017) issued
under title: The Regulation of Credit Rating Agencies : An Analysis of the
Transgressions of the Rating Industry and a Measured Proposal for Reform.
Identifiers: LCCN 2018018286 | ISBN 9780815363996 (hbk)
Subjects: LCSH: Rating agencies (Finance)–Law and legislation.
Classification: LCC K1114.7 .C37 2018 | DDC 346.07/3–dc23
LC record available at https://lccn.loc.gov/2018018286
ISBN: 978- 0- 815-3 6399- 6 (hbk)
ISBN: 978- 1- 351- 10791- 4 (ebk)
Typeset in Galliard
by Out of House Publishing
v
Dedicated to my Mother, Jane.
vi
vi i
Contents
Acknowledgements xi
Introduction 1
1 A primer on the credit rating domain 4
Introduction 4
The industry: who they are 6
The industry: what it does 10
The rating process 16
The rating committee 16
Signalling to the market 17
Credit rating agencies and issuers: a two- way street 19
A snapshot of the regulatory framework 20
Conclusion 25
2 The divergence between the actual and the desired 32
Introduction 32
The desired situation 33
The desired situation for issuers 33
The desired situation for investors 35
The desired situation for the state 37
‘Public interest’ or ‘public protection’? 40
The actual situation 44
Where loyalties lie – the relationship between the investor and the agency 45
Collusion 49
‘Stockholm syndrome’ 50
Appropriate punishment? 52
Rhinebridge (and Cheyne Finance) SIVs 53
The SEC’s Cease and Desist Order against S&P 56
CalPERS 59
Are investors completely innocent? 62
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viii Contents
The pivotal role of the guardian – where the emphasis lies for the state 64
Setting the scene 65
Deregulation – a false diagnosis 69
Mechanistic importance 74
Conclusion 77
3 Why the agencies transgress and what allows them to do it 85
Introduction 85
The oligopolistic structure of the ratings industry 87
Proposed alternatives to the rating oligopoly 92
Supplementation 94
The issuer- pays remuneration model 96
Hypotheses for the adoption of the issuer- pays model 97
The collapse of Penn Central hypothesis 97
The impact of technological advancement 101
The effects of the issuer- pays remuneration model 103
Regulatory reliance 106
Regulatory reliance: the blame game 107
The effects of SEC incorporation 109
Conclusion 111
4 Tried and failed 115
Introduction 115
The Dodd- Frank Act of 2010 – what were its aims? 116
A reality check 119
Conclusion 124
5 The issue of ancillary service provision 127
Introduction 127
S&P Capital IQ and Moody’s Analytics: vehicles of profit 129
S&P Capital IQ 130
Moody’s Analytics 133
The inherent issues with ancillary service provision – the view from
the literature 137
Pressure 138
Economic rent theory 140
Conclusion 144
6 A reform proposal 148
Introduction 148
The imperfections in the current framework governing ancillary
service provision 148
A reform proposal to limit the impact of the ratings industry
upon society 152
Absolute prohibition 152
The right to choose 154
ix
Contents ix
Divesture 154
Irreversibility 154
Potential benefits of the implementation of the reform proposal 155
Potential impediments to the implementation of the reform proposal 157
Conclusion 158
Conclusion 161
‘Consequences’ 162
Index 165
