The Credit Rating Agencies and Their Contribution to the Financial Crisis

Abstract

The credit rating agencies that dominated the ratings of mortgage‐backed securities were Moody's and Standard & Poor's. The two agencies rated some 4.3 trillion dollars of bonds as triple AAA, yet within a period of 18 months these same rating agencies downgraded these bonds to below investment grade. This paper seeks to show that the ratings agencies business model, the issuer pays approach, led to major conflicts of interest with both the ratings agencies unable to walk away from a rating. The evidence given by analysts to Congressional Inquiries confirms a cultural revolution within the rating agencies, with analysts feeling unable to question the quality of a rating. Analysts who were described as being awkward by issuers were removed from the rating process. In the meantime, the income for the rating agencies increased from 3 billion dollars to 6 billion dollars, with the CEOs of the rating agencies receiving incomes comparable to the incomes to the CEOs of investment banks.

Sources of power of the Big Three credit rating agencies in international financial markets

“…Skala tego procederu doprowadziła do krachu najpierw na giełdach amerykańskich, a przez ścisłą sieć zależności również na całym świecie. Szacuje się, że agencje ratingowe nadały najwyższe oceny obligacjom o wartości ponad 4 bilionów dolarów, a następnie w krótkim czasie musiały obniżyć ich ratingi do poziomu spekulacyjnego (Mullard, 2012).…”

Basel Methodological Heterogeneity and Banking System Stability: The Case of the Netherlands

“…Studying how such distinctions between point-in-time and through-the-cycle may have an influence in the context of the macro-regulation is essential due to the consequences of the regulatory reliance on credit rating systems. Over the last 20 years, empirical evidence and observations have revealed the destabilizing role of the through-the-cycle rating systems in the origin and amplification of the Sovereign crises and the default of large corporations (Ferri et al (1999), Mora (2006, Frost (2007), Partnoy (2009), Hunt (2009), and Mullard (2012)). While the recent financial crisis has put in practice the procyclicality bias of the point-in-time rating systems, already theoretically described before the implementation of Basel II by Jackson (2000), Borio et al (2001), Kashyap et al (2004) and Catarineu-Rabell (2005).…”

Die Entdeckung einer Politik des Unpolitischen. Zur Institutionalisierung der „List der Vernunft“ in der Fiskalpolitik

“…Mit dieser Meinung steht es nicht alleine. Auch politische Entscheidungsträger vertrauen auf den Rat von Anwaltskanzleien (Meßerschmidt 2012), IWF, Deutsche Bank oder orientieren sich an Rating Agenturen, die sich selbst als "impartial agency" definieren (Mullard 2012). Dahinter steckt die Vermutung, es gebe eine Lösung, die gleichzeitig dem politischen Zweck dient und dem parteipolitischen Streit (zu Recht) entzogen sei.…”