I’ve been listening to the Senate hearings about the financial market meltdown, and recently there has been a lot of talk about the credit rating agencies: Moody’s, Standard & Poors, among others. From what I’ve gathered, they were rating bonds which were secured by sub-prime mortgages as AAA, or investment grade. Since these bonds were rated so highly, those who sold them were able to pay lower interest rates to their purchasers.
As it turned out, the sub-prime mortgages were not very good quality assets, and they could indeed lose value - a lot of value. When they did lose value, not only did the bonds which were secured by the mortgages lose value, but as the credit rating went down, the interest rate upon which the bond issuer must pay went up.
Even without this knowledge, I had a feeling that the problems in the sub-prime mortgage marketplace would have far reaching implications. In learning about how these credit rating agencies essentially portrayed speculation as reliable investments, it makes sense that the housing bubble not only inflated house values, but also the value of the stock market in general.
I’m still learning a lot about this fiasco, how wide spread it is, what caused it, and what some potential solutions might be, and as I learn more, I’ll be posting my thoughts here on Informed Banking.
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