Joshua D. Krebs

Document Type



The credit rating agencies are supposed to be gatekeepers to the public securities markets. As “gatekeepers,” they are reputational intermediaries in the investment process. Other gatekeepers include: independent auditors, credit rating agencies, securities analysts, investment bankers, and attorneys. The function of these reputational intermediaries is to act as neutral third party advisors to the investment process. While these intermediaries are paid for their opinions by one or more parties to a transaction, in theory the opinions will be neutral. This is due to the thought that any resulting reputational damage from non-neutral opinions would severely damage long-term profitability, in exchange for mere short-term profits. The rating agencies are very different from other gatekeepers, as they exist in a position of profitable limbo somewhere between market journalist and state authority. They claim they are merely reputational intermediaries sought by numerous market participants for neutral opinions on the safety of securities products. At the same time, they uniquely occupy a niche where government regulation mandates that market participants utilize their ratings; they are, in fact, selling compliance with official regulation. This puts them in a position of incredible power and provides them with little accountability. With the recent explosion of unregulated securities and the ensuing near collapse of the financial markets, it seems these agencies are perhaps not gatekeepers, but rather mechanics, greasing the wheels of a giant runaway train of dangerous financial products. This article will explore the rating agencies' role in this recent crisis and will discuss the need for increased regulation or liability for the agencies to function effectively. This comment will ask what is the most realistic way to accomplish this. Part II is an introduction to who the rating agencies are and what they do. Part III looks at how we got where we are and explores two common criticisms against the agencies that even their former employees attest to. Part IV navigates recent responses, both by the agencies to criticism and by the government through the SEC. Part V looks at past liability exposure to the agencies and common defenses they have raised. There will also be some discussion of whether legislation passed has changed anything, as well as a look at a common barrier to litigation against the agencies. Finally, Part VI offers the author's own opinions on where we go from here.