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Those AAA ratings meant that mortgage-backed securities could be included in risk-averse mutual funds or bought by endowments or pension funds. That spread the
by giaour 11y ago
Those AAA ratings meant that mortgage-backed securities could be included in risk-averse mutual funds or bought by endowments or pension funds. That spread the risk to parties that would probably never knowingly invest in subprime mortgages on a large scale.
It also meant that bankers could craft poisonous securities, get them rated AAA, and then massively short them. I recall one case like that, though I'm blanking on the details.
- slavik81 11y agoThe real truth the crisis underscored is that the ratings agencies are useless at actually scrutinizing the risks on the things they rate. The fact that they remain a trusted arbitrator for certain investor classes is concerning, because it implies that as useless as they are, they're still more competent than institutional investors. Personally, I'm glad I don't have to trust my retirement savings to a pension fund.
- desdiv 11y ago>The real truth the crisis underscored is that the ratings agencies are useless at actually scrutinizing the risks on the things they rate. Enron was rated investment grade by the rating agencies four days before its bankruptcy. Fool me once, shame on you; fool me twice...
- icebraining 11y agoThe fact that they remain a trusted arbitrator for certain investor classes is concerning, because it implies that as useless as they are, they're still more competent than institutional investors. There's another interpretation: by "trusting" these rating agencies, institutional investors can shift the blame when the investments go wrong.