Wednesday, July 17, 2013
Posted by D. Daniel Sokol
Rosa M. Abrantes-Metz, Global Economics Group, LLC; New York University - Leonard N. Stern School of Business - Department of Economics and Kristiyana T. Teodosieva, New York University (NYU) - Leonard N. Stern School of Business ask What’s to be Done with Rating Agencies? Understanding the Problem to Find a Solution.
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.