Question

Should you blindly trust the ratings given by the Risk Rating Firms? Are those qualifications a revealed truth? If so, then why did many people become financially bankrupt with mortgaged collateral investments in the 2007-2008 crisis? I need an opinion supported, to argue, references are needed
thanks for your help.

Answer 1

Answer: Yes, We should rely upon the credit ratings given by credit rating agencies.

Credit rating is the assessment of a firm or an individual to repay the debts and other obligations.

Credit ratings are provided by credit rating agencies such as Moody's, Standard & Poors, Fitch, ICRA, CARE etc. These credit rating agencies have highly qualified managers who analyze the companies 360 degree and then provide the credit ratings to its bonds. We can rely upon the credit ratings because on the basis of that we can buy the bonds.

People became financially bankrupt in 2007-2008 because of the Sub prime crisis. In USA, It all started in late 2007 and last till 2009. It was due to Sub prime crisis. In 2007, In USA, real estate industry was in boom, many properties were being built by taking mortgage loan from banks and other financial institutions, banks lend loan without proper documentations and collateral. Later on as the demand of real estate came down but supply was high, prices drop. Many properties got unsold and people and Infra companies could not sell the properties so could not repay the loan. Banks got bankrupt because of liquidity crunch because their loan was unpaid. Many big banks got insolvent including Lehman brother's and Merrill Lynch. This led to financial crisis and it affected economies of several countries.