Credit rating

Not personal credit ratings, however — corporate credit ratings.  The insightful Big Picture has another post about the causes of the crisis in the financial markets.  This time he highlights the role of the credit rating agencies in causing the crisis.

Back in the day the credit rating agencies such as Moodys and Standard & Poors were paid by bond buyers.  They would rate the credit worthiness of various bond issues and tell their customers how risky the bonds were.

But then in the 1990s the agencies started getting most of their revenues from the bond sellers instead of the bond buyers, and so their incentives were to make the bonds look like they were not risky regardless of the underlying financials.  If they didn’t give the bonds (and other newer and more exotic forms of borrowing) high ratings the borrowers would take their business to somebody who would give them a high rating and they would lose out on that money.

At the same time they went from being privately held to publicly traded companies and so the emphasis went from having stable profits to maximizing quarterly returns and the incentive to get the money now increased.

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One Response to Credit rating

  1. H. M. Stuart says:

    Radial, we’d like to invite you to become one of our Authors in Alexandria. You may mirror your existing posts from here or elsewhere or produce original posts there, as you desire. For your contributions and participation we will blogroll you with no reciprocation required. Come contribute your perspectives and opinions to the ongoing conversations there. Contact us for full invitations and instructions.

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