Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

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 what were supposed to be predictable assets—regular domestic mortgages. The ratings agencies did not have to calculate the risks of default on the basis of more or less subjective evaluations of a company’s business prospects. Nor did they have to render a judgment on a country’s fiscal policy. Instead, they could apply standardized financial mathematics to a population of mortgages that was assumed