Overdependence on Credit Ratings Was a Primary Cause of the Crisis
Date
01.01.2009
01.01.2009
Authors
Frank Partnoy
JEL Code
G24
G24
Keywords:
Rating Agencies,Subprime Mortgages,Securitization
Rating Agencies,Subprime Mortgages,Securitization
Publisher
Economy and Society
Economy and Society
Editor
Fausto Panunzi
Fausto Panunzi
JOURNAL
World Scientific
World Scientific
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.