The Credit Rating Agency Reform Act (Pub. L. 109–291 (text) (PDF)) is a United States federal law whose goal is to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating agency industry.[1]
Enacted after being signed by President Bush on September 29, 2006,[1][2] it amended the Securities Exchange Act of 1934 to require nationally recognized statistical rating organizations (NRSROs) to register with the Securities and Exchange Commission (SEC).[2][3][4]
Critics had complained that the dominance of "the big three" rating agencies – Standard & Poor's Ratings Services, Moody's Investors Service and the smaller Fitch Rating—were in part responsible for the subprime mortgage crisis of 2006–8.[5] The agencies rated 98% of the trillions of dollars of home-mortgage oriented "structured investment" products. Hundreds of billions of dollars' worth of securities given the agencies highest—triple-A—rating were later downgraded to "junk" status,[6][7][8] and the writedowns and losses came to over half a trillion dollars.[9][10][11]
The Act permitted smaller, newer credit rating agencies to register as "statistical ratings organizations".[2][12] The intent of the U.S. Congress was to increase the choice for consumers by opening the market to a greater number of ratings agencies, and also to incent accurate and reliable ratings.[4][12]
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was invoked but never defined (see the help page).Overall, my findings suggest that the problems in the CDO market were caused by a combination of poorly constructed CDOs, irresponsible underwriting practices, and flawed credit rating procedures.
Without those AAA ratings, the gold standard for debt, banks, insurance companies and pension funds wouldn't have bought the products. Bank writedowns and losses on the investments totaling $523.3 billion led to the collapse or disappearance of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. and compelled the Bush administration to propose buying $700 billion of bad debt from distressed financial institutions.
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