The Dodd-Frank Act included important reforms of the derivative market. Nearly three years after passage of the Act, Congress is now considering amendments. I’m testifying this week on the derivatives reform amendments before the U.S. House of Representatives in opposition of several of the amendments as a reversal of the needed reform.
Title VII of the Dodd-Frank Act mandates important changes in U.S. derivative markets, but many of these changes are not yet fully implemented. As Americans remain threatened by the same dangers that exploded on the country in 2008, Congress should consider ways to encourage and enable the full implementation of the Dodd-Frank derivative reforms. Read More »
With regard to financial reform, the outcome of the November election seems straightforward. At the presidential level, the too-big-to-fail banks bet heavily on Mitt Romney and lost; President Obama received relatively few contributions from the financial sector, in contrast to 2008. In Senate races, Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio demonstrated that it was possible to win not just without Wall Street money but against Wall Street money. Read More »
My latest paper* focuses on the difficulties that rating agencies face in setting a credit score that accurately reflects the credit quality of a borrower, but also takes into account the effect that score will have on the borrower’s credit quality in the future. When a rating agency cuts a given company’s credit rating, investor confidence in that company’s ability to meet its debt obligations is undermined, making it very difficult for the company to raise cash. The downgrade often becomes a self-fulfilling prophecy.
In my paper I talk about the ideal accurate credit rating environment. It’s important to note that there may be several possible ratings that are accurate for a particular firm or country at any point in time, but some of these ratings lead to more distress than others. I believe rating agencies ought to be careful to select the best rating: one that provides an accurate portrayal of the company’s credit worthiness, but also takes into account the continued existence of the company in question. These ratings – where the agencies have a small bias towards the ultimate survival of the companies they evaluate – allow the companies to borrow money at a lower interest rate and therefore improve their chances of withstanding any financial shocks that may arise.