A Note On Financial Crisis Essay

778 Words Nov 19th, 2016 4 Pages
An important example of deteriorating credit quality was immediately prior to the 2007/08 financial crisis when debt products such as collateralised debt obligations (CDO) were supposedly rated AAA and AA by credit-rating agencies just days before the debt issuing investment banks went bankrupt, ultimately leading to the global financial crisis.

CDOs are structured financial products that bundle value-generating assets such as bonds, mortgages and loans together and repackages them to allow for sale to the investor. Investment banks such as Lehman Brothers and Bear Stearns grouped individual mortgage-backed securities (MBS) into a bundle that could be bought and sold like bonds to investors in the form of CDOs.
The highest possible credit rating is AAA, this conveys the greatest level of creditworthiness as the debt issuer should easily be able to meet their commitments.

Standard & Poor’s, Moody’s and Fitch are the top three credit-rating agencies and played a major role in causing the systemic collapse of the economy in 2008 as they continued to give AAA ratings to subprime MBSs and CDOs. They issued the highest grade of credit rating to a huge number of securities that would now be considered as ‘junk’. The big three agencies are still trying to restore their damaged reputations resulting from the financial meltdown of ’08 today.

But how and why did this happen? S&P, Moody’s and Fitch failed to issue warnings to investors of the danger of investing in the CDOs and…

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