Attaching Criminal Liability to Credit Rating Agencies: Use of the Corporate Ethos Theory of Criminal Liability
Year: 2014
Type: article
Abstract: CRAS 169 percent in 2007. 2 Because the potential profits were so great, the pressures to create and rate these issues highly were immense.CRAs continued to rate structured finance without written procedures, without rationale for deviations from their models, and without policies to address the known deficiencies in their models.Because borrowers inevitably know more about their business operations and the risks involved in investing than investors, there is a situation of asymmetric information, 3 which could hinder the efficient allocation of capital throughout the economy.Economists have long recognized that because of these information asymmetries, intermediaries are necessary to ensure a smooth flow of credit throughout the economy.4 CRAs fulfill this role.In theory, CRAs act as neutral third parties providing unbiased information with respect to the creditworthiness of investments offered.5 They serve as gatekeepers, protecting both public 2. CalPers Complaint, supra note 1, at ¶ ¶ 43-46.3 .See generally George Akerlof, The Market for Lemons: Quality Uncertainty and Market Mechanism, 84 Q.J. OF ECON.488 (1970) (giving examples of some of the effects of asymmetric information); Stephane Rousseau, Enhancing the Accountability of Credit Rating Agencies: The Case for a Disclosure-Based Approach, 51 MCGILL L.J. 617, 622 (2006) ("Inevitably, information asymmetry exists in the debt market because issuers have superior information regarding their creditworthiness than do investors.");Lawrence J. White, Credit Rating Agencies and the Financial Crisis: Less Regulation of CRAs is a Better Response, 25 J. INT'L BANKING L. & REG.170, 174 (2010) ("The critical problem is one of asymmetric information: The borrower usually knows more about the prospects for repayment than does the lender."). 4. See, e.g., Harold Furchtgott-Roth, Robert W. Hahn & Anne Layne-Farrar, The Law and Economics of Regulating Ratings Firms, 3 J.COMPETITION L. & ECON.49, 76 (2007) ("[I]nformation asymmetries between buyers and sellers created an opening for independent rating firms.");Theresa Nagy, Credit Rating Agencies and the First Amendment: Applying Constitutional Journalistic Protections to Subprime Mortgage Litigation, 94 MINN.L. REV.140, 143 (2009) ("Rating agencies emerged in the financial market at the beginning of the twentieth century, likely to help level the information imbalance that inherently exits in lending relationships.");Frank Partnoy, The Siskel and Ebert of Financial Markets?: Two Thumbs Down for the Credit Rating Agencies, 77 WASH.U. L.Q. 619, 632 (1999) ("Rating agencies may exist because of information asymmetry between debt issuers and investors.");Frank Partnoy, Overdependence on Credit Ratings was a Primary Cause of the Crisis 2 (U.San Diego, Research Paper No. 09-015, 2009), available at http://ssrn.com/abstract=1430653 ("In financial markets, to the extent that sellers cannot credibly make such disclosures, there are incentives for information intermediaries to play this role.");White, supra note 3, at 5 ("Credit rating agencies are one potential source of help for piercing the fog of asymmetrical information . . ..").5. See Joshua D. Krebs, The Rating Agencies: Where We Have Been and Where Do We Go From Here?, 3 J.BUS.ENTREPRENEURSHIP & L. 133, 134 (2009) ("The function of these reputational intermediaries is to act as neutral third party advisors to the investment process.");see also Sulette Lombard, Credit Rating Agencies as Gatekeepers: What Went Wrong?(2009), at 2, available at http://www.clta.edu.au/professional/papers/conference2009/LombardCLTA09.pdf("The function of credit rating agencies is to 'rate' investment and credit instruments to make it easier for non-specialist investors to determine the risk
Authors: Nan S. Ellis, Steven B. Dow
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W756159620