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Overdependence on Credit Ratings Was a Primary Cause of the Crisis

Author

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  • Frank Partnoy

    (University of San Diego School of Law)

Abstract

The first part of the paper describes how over time credit rating agencies ceased to play the role of information intermediaries. Rating agencies did not provide information about the risk associated with the securitized instruments, but they simply enabled structurers to create and maintain tranches of these instruments with unjustifiably high credit ratings. The second part of the paper suggests how future policy may minimize overdependence on credit ratings, by removing regulatory licences and by implementing shock-therapy mechanisms to wean investors simple rating mnemonics.

Suggested Citation

  • Frank Partnoy, 2009. "Overdependence on Credit Ratings Was a Primary Cause of the Crisis," Working Papers 2009.27, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2009.27
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    File URL: http://www.feem.it/userfiles/attach/Publication/NDL2009/NDL2009-027.pdf
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    Cited by:

    1. Aggelos KOTIOS & George GALANOS & Spyros ROUKANAS, 2012. "The Rating Agencies In The International Political Economy," Scientific Bulletin - Economic Sciences, University of Pitesti, vol. 11(1), pages 3-15.
    2. Tao Wang, 2016. "Time-Varying Rating Standards and the Distorted Incentives of Credit Rating Agencies," Global Credit Review (GCR), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 21-39.
    3. Leung, W.S. & Taylor, N. & Evans, K.P., 2015. "The determinants of bank risks: Evidence from the recent financial crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 277-293.
    4. Lorenzo Sasso, 2016. "Bank Capital Structure and Financial Innovation: Antagonists or Two Sides of the Same Coin?," HSE Working papers WP BRP 66/LAW/2016, National Research University Higher School of Economics.

    More about this item

    Keywords

    Rating Agencies; Subprime Mortgages; Securitization;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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