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Understanding rating addiction: US courts and the origins of rating agencies' regulatory license (1900–1940)

Published online by Cambridge University Press:  26 November 2013

Marc Flandreau  and
Joanna Kinga Sławatyniec
Marc Flandreau*
Affiliation:
The Graduate Institute, Geneva
Joanna Kinga Sławatyniec*
Affiliation:
The Graduate Institute, Geneva
*
Corresponding author: Marc Flandreau, Graduate Institute of International and Development Studies, Maison de la Paix, Chemin Eugène-Rigot 2, Case Postale 136 CH1211 Genève 21, Switzerland, marc.flandreau@graduateinstitute.ch, joanna.slawatyniec@graduateinstitute.ch
Corresponding author: Marc Flandreau, Graduate Institute of International and Development Studies, Maison de la Paix, Chemin Eugène-Rigot 2, Case Postale 136 CH1211 Genève 21, Switzerland, marc.flandreau@graduateinstitute.ch, joanna.slawatyniec@graduateinstitute.ch
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Abstract

This article challenges the ‘regulatory license’ view that reliance by regulators on the output of rating agencies in the 1930s ‘caused’ the agencies to become a central part of the fabric of the US financial system. We argue that long before the 1930s, courts began using ratings as financial-community-produced norms of prudence. This created ‘a legal license’ problem, very analogous to the ‘regulatory license’ problem, and gave rise to conflicts of interest not unlike those that have been discussed in the context of the subprime crisis. Rating agencies may have had substantial responsibility for the Great Depression of the 1930s.

JEL classification

G24: Investment Banking • Venture Capital • Brokerage • Ratings and Ratings Agencies K22: Business and Securities Law G28: Government Policy and Regulation N22: U.S. • Canada: 1913–
Type
Articles
Information
Financial History Review , Volume 20 , Issue 3 , December 2013 , pp. 237 - 257
Copyright
Copyright © European Association for Banking and Financial History e.V. 2013 

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