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The Ethics of Credit Rating Agencies: What Happened and the Way Forward

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  • Steven Scalet

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  • Thomas Kelly

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    Abstract

    During the short span of a few months in 2008, 14 trillion dollars of highly rated bonds fell into junk status, surprising the global financial system and accelerating an economic decline. The result was the worst fracture of the US financial system since the Great Depression. Credit rating agencies (CRAs) in particular have come under intense scrutiny as a result of this latest disaster, both domestically and internationally, including many congressional inquiries and government investigations. Most of the public and scholarly discussions about CRAs focus on reforming the financial system so that the crisis of the magnitude of the 2008 disaster will not happen again. An important overtone of industry criticisms includes a sense of ethical impropriety on the part of CRAs and ethical uncertainty about the institutional mechanisms that are currently in place. Rarely, however, are the ethics of the industry the explicit subject of analysis. In this article, we discuss the lessons from the policy debates and recent legislation to develop an account of the ethics of the CRA industry. Copyright Springer Science+Business Media B.V. 2012

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    File URL: http://hdl.handle.net/10.1007/s10551-012-1212-y
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Business Ethics.

    Volume (Year): 111 (2012)
    Issue (Month): 4 (December)
    Pages: 477-490

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    Handle: RePEc:kap:jbuset:v:111:y:2012:i:4:p:477-490

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    Web page: http://www.springerlink.com/link.asp?id=100281

    Related research

    Keywords: Credit rating agencies (CRAs); Ethics; Finance; Credit crisis; SEC; Securities; Rating bonds; 2008 Subprime meltdown; Finance ethics; Business ethics; Corporate responsibility;

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    1. Vasiliki Skreta & Laura Veldkamp, 2008. "Ratings Shopping and Asset Complexity: A Theory of Ratings Inflation," Working Papers 08-28, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
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