Sunday, April 27, 2008

Role of rating agencies

The aftermath of the sub-prime mortgage crisis has brought to sharp focus on the role played by the credit rating agencies in inflating the bubble. Roger Lowenstein chronicles the anatomy of these ratings and the evolution of rating agencies in a revealing NYT article.

Frank Partnoy, a professor at the University of San Diego School of Law who has written extensively about the credit-rating industry, says that thanks to the industry’s close relationship with the banks whose securities it rates, they have behaved less like gatekeepers than gate openers. This was best manifested in the numerous sub-prime mortgage loan backed securities being rated tiple -A! Last year, Moody’s had to downgrade more than 5,000 mortgage securities — a tacit acknowledgment that the mortgage bubble was abetted by its overly generous ratings.

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