Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Not surprisingly, given the very high ratings they handed out for MBS, the role of the ratings agencies would later become highly controversial. By the 1990s, Moody’s Investors Service and Standard & Poor’s divided 80 percent of the global debt-rating business between them.21 Fitch took another 15 percent of the market. They did not attain that control of the global market by freely handing out top AAA ratings. In 2008 there were only six AAA-rated corporations and no more than a dozen countries enjoying that ranking. This was despite the fact that since the 1980s it was issuers of debt who paid the ratings agencies to make their classifications, not the subscribers to their information services. Payment by the issuer created a conflict of interest. But the agencies had much to lose if they appeared to be selling good ratings and relatively little to gain if they showed favor to a client that was involved in only occasional bond issues. The mortgage securitization business changed that calculus. The sheer volume of mortgage-backed security issuance, involving tens of thousands of tranches, combined with the fact that the flow was concentrated in the hands of a few issuers, gave the ratings agencies a significant incentive to be “helpful.”22 But even more important was the nature of MBS as such. What made rating MBS different was that the underlying assets were not bonds issued by a company facing the unpredictable force of global competition. The MBS bundled thousands of w...