Nationally Recognized Statistical Rating Organization - Subprime Mortgages, CDOs, and The Financial Crisis

Subprime Mortgages, CDOs, and The Financial Crisis

The ratings agencies were heavily involved in the markets that enabled the subprime credit bubble of 2000-2008 and the subsequent financial crisis. In 1984 the federal government of the United States passed the Secondary Mortgage Market Enhancement Act (SMMEA) to improve the marketability of private-label (non-agency) mortgage-backed securities, which declared NRSRO AA-rated mortgage-backed securities to be legal investments equivalent to Treasury securities and other federal government bonds for federally-charted banks (such as federal savings banks, federal savings associations, etc.), state-chartered financial institutions (such as depository banks and insurance companies) unless overridden by state law by October 1991 (of which 21 states did so), and Department of Labor-regulated pension funds.

The agencies made massive profits from rating Collateralized debt obligations, Residential Mortgage Backed Securities, and other creatures of structured finance intimately connected to the subprime industry. The ratings on these products were essential to the way the banks marketed the products. Buyers, like pension funds, university endowments, and cities (a classic example being the city of Narvik, Norway), relied on these ratings in their decisions to purchase CDOs and other structured finance products. The activities of the ratings agencies have been detailed in many books, including The Big Short, by Michael Lewis, Confidence Game by Christine S. Richard, All The Devils are Here by Bethany McClean and Joe Nocera, and in many other accounts of the financial crisis. Janet Tavakoli, author of Structured Finance and Collateralized Debt Obligations, has suggested that these agencies lose their NRSRO status in relation to certain financial products. In 2011, the US Senate released the Levin-Coburn report on "Wall Street and the Financial Crisis"; it did a case study of the behavior of some of the credit ratings agencies during the crisis.

Read more about this topic:  Nationally Recognized Statistical Rating Organization

Other articles related to "financial crisis, the financial crisis, financial":

Credit Default Swap - Criticisms
... Furthermore, there have been claims that CDSs exacerbated the 2008 global financial crisis by hastening the demise of companies such as Lehman ... have argued that not only has the CDS market functioned remarkably well during the financial crisis that CDS contracts have been acting to distribute risk just as was intended and that it is not CDSs themselves that ... Some general criticism of financial derivatives is also relevant to credit derivatives ...

Famous quotes containing the words crisis and/or financial:

    Without metaphor the handling of general concepts such as culture and civilization becomes impossible, and that of disease and disorder is the obvious one for the case in point. Is not crisis itself a concept we owe to Hippocrates? In the social and cultural domain no metaphor is more apt than the pathological one.
    Johan Huizinga (1872–1945)

    A theory of the middle class: that it is not to be determined by its financial situation but rather by its relation to government. That is, one could shade down from an actual ruling or governing class to a class hopelessly out of relation to government, thinking of gov’t as beyond its control, of itself as wholly controlled by gov’t. Somewhere in between and in gradations is the group that has the sense that gov’t exists for it, and shapes its consciousness accordingly.
    Lionel Trilling (1905–1975)