FEEM working papers "Note di lavoro" series
2009 .027

Overdependence on Credit Ratings Was a Primary Cause of the Crisis


Authors: Frank Partnoy
Series: Economy and Society
Editor: Fausto Panunzi
Type: Book
Keywords: Rating Agencies,Subprime Mortgages,Securitization
JEL n.: G24
JEL: Chapter in First Credit Market Turmoil of the 21st Century: Implications for Public Policy by Douglas D. Evanoff, George G. Kaufman and Philipp Hartmann (eds)
Published in: World Scientific
Date: 2009

Abstract

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.

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