Remember This Moment When the Next Financial Crisis Strikes

The SEC could have fixed our broken rating agencies. It whiffed

By David Dayen

Credit rating agencies were the drivers of the financial crisis. Their AAA stamps of approval encouraged investors to purchase massive quantities of subprime mortgage-backed securities. As we now know, these assurances of complete safety led investors right into a toxic meltdown.

This was entirely foreseeable: Rating agencies get paid to rate securities by the companies who issue them. This places an inherent conflict of interest at the heart of their business model: If they make it easier for a client to sell questionable securities by rating them highly, then that client will return with future business. Examples of rating inflation abound, and even the Justice Department, which has shown little willingness to go to trial over financial fraud, has an active $5 billion lawsuit against Standard and Poor’s for granting AAA ratings to securities the company knew was junk.