Question

In your Own words , write a paragraph about the relationship between the credit rating agencies and the financial crisis

kindly typed

Answer 1

There is a strong relationship between the rating agencies and the onset of subsequent financial crisis.

The investors trust the ratings given by the rating agencies, and they make investments accordingly, but when these rating agencies try to offer ratings which are misleading to the investors , then it can lead to a major financial crisis.

For example, The financial crisis in 2008, was brought upon by the rating agencies selling risky securities like the collateralized debt obligations. They gave higher ratings to these risky securities , which made investors invest their money which they eventually lost in the crisis. This led to the great recession of 2008.

These ratings agencies  fraudulently gave AAA ratings to risky securities and project them to be very safe and secure investments. They build the investor confidence and can lead to investors losing a lot of money. So, after this crisis , these agencies were highly regulated by the Government agencies to prevent any future Financial crisis fueled by misleading investors