| dc.description.abstract | The underlying assets of mortgage-backed securitization are mainly composed of sub-primes mortgages in the US in the recent years, and this in term increases the overall credit exposure in the financial market. The emergences of derivative products such as MBS, CDO, and CDS have diverted the credit risks to the capital market and in transition, more investors are exposed to such risks. Consequently, the core of today’s financial market becomes more about taking and shifting credit risks. This might in turn magnify the systematic risks and should a crisis happens, it would amplify the effect.
The qualities of subjectivity, fairness and transparency in rating mechanism are the important fundamentals in the credit trading market. In the case of new financial innovated products such as CDO and CDS, investors do not have direct access to the actual underlying risks; they have to rely entirely on the independent credit rating mechanism. However, in the case of sub-primes crisis, the credit rating agencies have vacillated market’s confidence and reliance on them. By evaluating the historic default rates and using mathematically models, good ratings were produced on sub-primes products before the sub-prime crisis. The deterioration of the US real estate market was not within credit rating agency’s expectation and underestimated the default rates. The agencies remodeled the assumptions and downgraded the ratings instantly after sub-primes crisis started. This makes the market question the agencies’ standards in producing credit ratings. In addition, the clients of the rating agencies are often the issuers of those sub-primes products, one cannot help to interrogate the subjectivities of the agencies and the possible conflicts of interests between client and the agencies.
This article discusses the importance of credit rating agencies in the success or failure of the securitization products. It recites the roles played by the rating agencies in this sub-primes crisis; and it induces the possible risks in the credit rating mechanism. The article suggests possible reforms for the future changes in regulations. | en_US |