Overdependence on Credit Ratings was a Primary Cause of the Crisis
25 Pages Posted: 29 Jun 2009
Date Written: June 29, 2009
The first part of the paper describes how over time credit rating agencies ceased to play the role of information intermediaries. Rating agencies did not provide information about the risk associated with the securitized instruments, but they simply enabled structurers to create and maintain tranches of these instruments with unjustifiably high credit ratings.
The second part of the paper suggests how future policy may minimize overdependence on credit ratings, by removing regulatory licences and by implementing shock-therapy mechanisms to wean investors simple rating mnemonics.
Keywords: Rating Agencies, Subprime Mortgages, Securitization
JEL Classification: G24
Suggested Citation: Suggested Citation