In a 2010 hearing, Senator Carl Levin stated: “Looking back, if any single event can be identified as the immediate trigger of the 2008 financial crisis, my vote would be for the mass downgrades starting in July 2007, when the credit rating agencies realized their AAA ratings wouldn’t hold and finally stopped labeling toxic mortgages as safe investments.” Rating agencies “downgraded” hundreds of previously “triple- A” rated mortgage securities causing major write-offs, triggering margin calls, damaging investor confidence and sharply reducing valuations.
Title IX of Dodd-Frank, the Investor, Protection and Securities Act, amends the Securities Exchange Act of 1934 to include an Investor Advisory Committee. Subtitle C, improves the regulations over credit rating agencies by creating a new Office of Credit Ratings within the SEC with broad oversights powers over the National Recognized Statistical Rating Organizations (NRSRO) and strengthens existing investor protection laws.
The Office of Credit Ratings is required to develop risk retention controls and requirements to ensure that securitizes and originators keep “skin in the game” by retaining an economic interest in a substance portion of the credit risk for any asset that they securitize or originate. The risk retention rules would apply to private-label mortgage backed securities, the main source of funding to the subprime sector, not those backed by Fannie or Freddie.
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