16 1.2 Securitizations’ rise to fame Sq eucaur rt ei tri zoaft i o2 n0 0p7l .a yMe adnay kme ya rrkoelte oi nb stehrev eGrFs Ca rt hg aute stthaar tt etdh ei n dtehpet hs eacno dn dl eonrg tt hh i rodf t( hr eef ecrrri se ids two aa ss “t shue brpersi uml te ob fo ra rno wo veerr”e) xt theant swi oenr eosf emc uorrittgi zaegde sa nt od swoel da kt obionrvreoswt oerrss. Investors overpriced these securities as the credit ratings attached to the tranches rr ae tf li encgtse dw ear emtuocoh omp toi mr ei spt oi cs iat ni vde doi ud t nl ooot kr et fhl ea cnt wt haes aacct tuuaal l cl yr etdhiet rciasske o. fTah et r ac rnecdhiet (also known as inflated ratings). When mortgage rates started to rise, debtors, ep sapy emc ei anl tl ys hhooc mk . eTohwi sn reer ss u lwt eidt hi n ahdi jguhs tdaebf laeu- lrta rt ea t ems oa rntdg acgoenss, e qf auceendt l ya h img ho rl ot gsas ge es froerl i ba no tche i on nv e cs rt oe dr si ti nr at ht ien sges nai onrdt rt ahne ci rh easpapnedt i tj ue ntioo ri nt rvaensct hiens .s Ne caut ruirtai zl layt, iionnvse swt oerrse’ significantly reduced after the crisis5. It is alleged that this chain of events was predominantly caused by the CRAs assigning inflated credit ratings as a result of cmoomdpeel ti si t isvter upcrteusrseudr e( sseien, et h. ge. , rDaet i nHga amna&r kAemt atne ndbtrhien kw, a2y0 1i n1 )w. h i c h t h e i r b u s i n e s s 1.3 Issuer pays revenue model Twhaey ipna rwa hmi cohu nr te vreenaus oe ni s wg he yn eCr aRtAe ds ba sys iCgRnA tsh; et shee i‘ insfsl ua teerdp ac ryes d’ irte vr ea nt iuneg smios dtehl e 6. . In this model, a conflict of interest might arise as the issuer is the key client of the CRA. Issuers are likely to select only the best, most optimistic rating to ot hpetiirm iczlei e nt ht se’ i r( i p. er. ,o fiist ss u. eCrosn) s we qi us heenst l yb, yC RpAr os v imd iing hg t mboe r ei n coepnt ti mi v iizs et idc t(oi n fpl al et ea ds e) 5c oEmx pa lnetxe ,niantvuerset oorf ss we ceurrei tfioz ua nt i do nt ot hs ai gt nmi fai ckaens t il ty mr eol yr eodni ftfhi ceucl tr ef od ri t i rnavtei ns tgo irns tt oh emi rarkies kt haesisreos swmn erni st ,kma as si ne lsys md ueen tt o( stehee, e.g., Furfine, 2014). 6 See, e.g., Flynn & Ghent (2018), Griffin et al. (2013), He et al. (2016) and Zhou et al. (2017).
RkJQdWJsaXNoZXIy MTk4NDMw