The first battle of wills sparked by financial regulation has begun. Congress wants the rating agencies to suffer should standards again slip towards the carelessness of the credit boom – the new act removed a long-standing protection from expert liability for a rater’s opinion. In response, the raters have gone on strike, refusing to let their opinions be published in prospectuses for new issues of structured credit (a regulatory requirement), bringing public issuance to a standstill. How the Securities and Exchange Commission resolves the impasse will give an indication of the new regime’s level of aggression.

In the short term, securitisation can move to private issuance, with lighter disclosure requirements. But, as fewer investors can take part, the market is shallow and volumes will fall – reducing the availability of consumer credit. And Congress is unlikely to restore the exemption: it also lowered the standard under which rating agencies may be sued from outright fraud to include reckless behaviour as well. Legislators wanted more liability.

The SEC has options. It could remove the requirement for a rater’s opinion in prospectuses, although the regulation was introduced in 2005 to address shortcomings in the disclosure of material information. A face-saving compromise may be possible while it ponders the ultimate structure of the industry. The regulator has two years to recommend changes, giving the raters reason to co-operate.

As a last resort, the SEC might try to stare down the strikers. It could make consent to publish opinions a condition of status as a nationally recognised statistical rating organisation. But fees would rise as a consequence, ultimately making credit more expensive, a politically unpalatable consequence. The rating industry again seems likely to defy attempts to reshape it.

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