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I have heard a story that goes like this: -Rating agencies set criteria for marking things BB, BBB, etc. -Banks noticed that those criteria did not perfectly
by Rylinks 10y ago
I have heard a story that goes like this:
-Rating agencies set criteria for marking things BB, BBB, etc.
-Banks noticed that those criteria did not perfectly correlate with credit risk and created products that optimized for ratings rather than low risk.
-People bought these products based on the rating, and then got blown up.
You should take this with several grams of salt; I don't know if it's actually true.
- jolux 10y agoThe ratings agencies also have a direct conflict of interest in how they rate securities because the bank will go to their competitor if they don't get the rating they want.
- sievebrain 10y ago"their competitor" looks like a typo but is correct. US financial regulation grants a duopoly to the two big ratings agencies: despite their utter failure in 2008 and despite the low barriers to entry, no new competitors have emerged to challenge them because of that.