credit rating 2
credit rating 2 Credit rating agencies played a significant part in the financial meltdown, failing (sometimes intentionally) to properly estimate complicated products’ risk. This column summarises the problems plaguing the industry – conflicts of interest, “shopping” for ratings, and informational issues. It concludes that regulators must reshape the agencies and their role. One of the major factors leading to the subprime crisis was the failure of credit rating agencies’ assessments of structured finance products. What are these ratings agencies, how did they go wrong, and what can regulators do to address the problems? The failure of the credit rating agencies: Evidence Credit rating agencies have been part of the financial system since the first ratings were issued by Moody’s in 1909. In 1975, the Securities and Exchange Commission formalised the role of the ratings agencies (and created a regulatory barrier to entry) by creating and granting the designation of Nationally Recognised Statistical Rating Organisation (White 2002).1 Despite complaints of agencies’ irresponsiveness during the East Asian Financial Crisis (1997) and the failures of Enron (2001) and Worldcom (2002), few foresaw the
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