What’s to be Done with Rating Agencies? Understanding the Problem to Find a Solution

5 Pages Posted: 3 Jul 2013 Last revised: 2 Sep 2013

Rosa M. Abrantes-Metz

Global Economics Group, LLC; New York University - Leonard N. Stern School of Business - Department of Economics

Kristiyana T. Teodosieva

New York University (NYU) - Leonard N. Stern School of Business

Date Written: August 18, 2013

Abstract

Credit Rating Agencies (CRA’s) were at the center of the recent financial crisis. Some have gone so far as to hold them responsible for it. A common argument is that the CRA’s, either due to avarice or incompetence, inflated the ratings of securities related to residential mortgages and in so doing abetted lower and lower underwriting standards in the origination of mortgages. They lulled market participants, including large and sophisticated banks, into a false sense of security, and when house prices fell and people began to default on their mortgages, those securities which had been deemed “AAA” safe began to take losses. Banks were not adequately capitalized against their tremendous exposures to such securities, and they quickly found themselves exposed to large, unanticipated losses. The rest, as they say, is history. This article identifies the antitrust problem in the structured finance ratings market and explains why most of the policy proposals put forward would not address the problem to be solved.

Keywords: Credit Ratings, Antitrust, Monopsony Power, Competition, Structured Finance

JEL Classification: G23, G38, K21

Suggested Citation

Abrantes-Metz, Rosa M. and Teodosieva, Kristiyana T., What’s to be Done with Rating Agencies? Understanding the Problem to Find a Solution (August 18, 2013). Available at SSRN: https://ssrn.com/abstract=2288195 or http://dx.doi.org/10.2139/ssrn.2288195

Rosa M. Abrantes-Metz (Contact Author)

Global Economics Group, LLC ( email )

22 Cortlandt Street
Suite 1600
New York, NY 10007
United States
(917) 499-4944 (Phone)

HOME PAGE: http://www.globaleconomicsgroup.com

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Kristiyana T. Teodosieva

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

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