Government Policies and The Subprime Mortgage Crisis - Regulation of Credit Rating Agencies

Regulation of Credit Rating Agencies

Further information: Credit rating agencies and the subprime crisis

Rating agencies such as Moody's and Standard and Poor's provide risk ratings for securities such as bonds and the mortgage-backed securities at the heart of the crisis. They are paid by the company issuing the bonds, which presents an independence issue. The rating agencies grossly erred in their assessment of risky mortgage-backed securities, providing the highest safety rating to securities that later became worthless.

The Financial Crisis Inquiry Commission reported in January 2011 that: "The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms."