NRSRO Rating Agencies (Moody's, S&P, Fitch)
Rating agencies caused the credit crisis through conflicted 'success fee' incentives; a 60-day new-issue moratorium plus pay-over-time fee structure would restore ratings integrity and market discipline.
Thesis
Pershing Square argues that NRSRO rating agencies (Moody's, S&P, Fitch) materially contributed to the credit crisis by overstating ratings on structured finance securities and bond insurers like MBIA, Ambac, Fannie Mae, Freddie Mac and AIG. The root cause is the 'success fee' payment model, in which issuers pay upfront and agencies compete for business by inflating grades. As a rider to the Restoring American Financial Stability Act of 2010, Pershing proposes a 60-day New Issue Ratings Moratorium barring NRSROs from contact with issuers, underwriters or public comment on new securities, forcing investors to do their own diligence and opening space for an 'Investor Pays' research market. Ratings fees would be set aside and paid over time in base, ranking and performance tranches, aligning NRSRO compensation with rating accuracy, and the SEC would be required to revoke status from chronic underperformers.
SCQA
NRSRO rating agencies sit at the center of credit markets, rating trillions of dollars of corporate debt, structured finance and bond insurers, with investors and regulators deferring to their grades under ratings-based mandates.
Under the 'success fee' model, NRSROs are paid upfront by issuers and compete on grade inflation, causing them to overstate ratings on structured products and bond insurers like MBI, ABK, FNM, FRE and AIG, materially driving the credit crisis.
Attach a rider to the Restoring American Financial Stability Act: impose a 60-day new-issue moratorium, pay ratings fees over time via base, ranking and performance tranches, repeal the NRSRO Reg FD exemption, and require the SEC to revoke NRSRO status for chronic underperformers.
Restored ratings integrity, emergence of 'Investor Pays' research, genuine buyside due diligence, and NRSRO compensation aligned with long-term rating performance rather than new-issue volume.
The three reasons
- 1
Inflated NRSRO ratings on structured finance and bond insurers (MBI, ABK, FNM, FRE, AIG) drove trillions in crisis losses
- 2
The 'success fee' model pays agencies upfront by issuers, incentivizing grade inflation and underwriter-like behavior
- 3
A 60-day new-issue moratorium plus pay-over-time fees aligns NRSROs with rating accuracy, not issuance volume
Primary demands
- Impose a 60-day New Issue Ratings Moratorium barring NRSRO contact with issuers, underwriters and public commentary on new securities
- Allow non-NRSROs to publish during the moratorium to seed an 'Investor Pays' research market
- Require the SEC to revoke NRSRO status for chronic underperformance vs. peers
- Repeal the NRSRO exemption from Reg FD so rating agencies no longer enjoy material non-public information advantages
- Mandate prospectus disclosure of any information that could reasonably impact ratings
- Restructure ratings fees into Base, Ranking and Performance tranches paid over the life of the bond, with non-payment an 'Event of Default'
- Attach the proposal as a rider to the Restoring American Financial Stability Act of 2010
Pattern membership
Composition what's on the 12 slides
Slide gallery ·
Notes
Atypical Pershing document: policy/regulatory reform deck (a suggested rider to the Restoring American Financial Stability Act of 2010), not an activist investment thesis on a specific company. No ticker, no valuation, no price target, no stake disclosed. No named human author on the cover — only the firm is credited. Target is the NRSRO industry as a class; named companies (MBI, ABK, FNM, FRE, AIG) are cited as examples of NRSRO rating failures rather than activist targets. Uses two explicit 'Old Paradigm / New Paradigm' side-by-side comparison slides (PDF pages 9 and 11), which are the most reusable visual device in the deck. Document type set to 'other' since it is neither a campaign deck nor a conference/Sohn-style presentation — it is a legislative rider proposal. thesis_types set to 'other' because none of the enumerated investment thesis types fit a regulatory-reform argument. Villain_named = false because critique stays impersonal (no named CEO/board chair/auditor).