The Credit Rating Agencies: Understanding Their Central Role in the Subprime Debacle of 2007-2008
Lawrence J. White
New York University (NYU) - Leonard N. Stern School of Business; Leonard N. Stern School of Business - Department of Economics
April 8, 2009
The three major credit rating agencies -- Moody's, Standard & Poor's, and Fitch -- played a central role in the subprime mortgage debacle of 2007-2008. That centrality was not accidental. Seven decades of financial regulation propelled these rating agencies into the center of the bond information market, by elevating their judgments about the creditworthiness of bonds so that those judgments attained the force of law. The Securities and Exchange Commission exacerbated this problem by erecting a barrier to entry into the credit rating business in 1975. Understanding this history is crucial for any reasoned debate about the future course of public policy with respect to the rating agencies.
Number of Pages in PDF File: 17
Keywords: credit rating agencies, nationally recognized statistical rating agency (NRSRO), Securities and Exchange Commission (SEC), bond information market
JEL Classification: G18, K23, L59
Date posted: July 16, 2009
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