The Credit Rating Agencies: Understanding Their Central Role in the Subprime Debacle of 2007-2008

17 Pages Posted: 16 Jul 2009

See all articles by Lawrence J. White

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics; Stern School of Business, New York University

Date Written: April 8, 2009

Abstract

The three major credit rating agencies -- Moody's, Standard & Poor's, and Fitch -- played a central role in the subprime mortgage debacle of 2007-2008. That centrality was not accidental. Seven decades of financial regulation propelled these rating agencies into the center of the bond information market, by elevating their judgments about the creditworthiness of bonds so that those judgments attained the force of law. The Securities and Exchange Commission exacerbated this problem by erecting a barrier to entry into the credit rating business in 1975. Understanding this history is crucial for any reasoned debate about the future course of public policy with respect to the rating agencies.

Keywords: credit rating agencies, nationally recognized statistical rating agency (NRSRO), Securities and Exchange Commission (SEC), bond information market

JEL Classification: G18, K23, L59

Suggested Citation

White, Lawrence J. and White, Lawrence J., The Credit Rating Agencies: Understanding Their Central Role in the Subprime Debacle of 2007-2008 (April 8, 2009). Available at SSRN: https://ssrn.com/abstract=1434483 or http://dx.doi.org/10.2139/ssrn.1434483

Lawrence J. White (Contact Author)

Stern School of Business, New York University ( email )

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New York University (NYU) - Leonard N. Stern School of Business, Department of Economics ( email )

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