The Role of Rating Agencies in Structured Finance

Essay from the year 2008 in the subject Business economics - Investment and Finance grade: 22 European Business School - International University Schloß Reichartshausen Oestrich-Winkel course: Introduction to Investment Banking language: English abstract: There are two superpowers in the world [...] the United States and Moody's Bond Rating Service - Thomas L. Friedman NY Times The above statement by Thomas L. Friedman accentuates the importance of credit rating agencies (CRAs) in modern financial markets. As the past months have shown Friedman's statement has held especially true for the role of CRAs in the structured finance market where CRAs are currently being made responsible for playing an integral role in the emergence of one of the biggest financial crises of mankind: the subprime crisis. The role and the importance of CRAs in the structured finance market is the central topic of the following paper. To fully understand the impact of this issue on the worldwide financial markets it is interesting to shed some light onto the dimensions of the structured finance market. The market is of considerable size given that outstanding structured finance securities in the United States amounted to 7.3 trillion US dollars in 2005 (Nomura 2005) and have now grown to 9 trillion US dollars which is more than two thirds of the United States GDP of 13.1 trillion US dollars in 2007 (U.S. Bureau of Economic Analysis BEA 2007). More-over these outstanding structured finance securities represent more than 30% of the total outstandings in the U.S. bond markets (Nomura 2005). As these figure reveal it is not surprising that complications in the core of the huge market of structured finance could potentially lead to a major destabilisation of the entire worldwide financial markets; a risk that was obviously underestimated for a long time and finally lead to the genesis of the sub-prime crisis. The role of CRAs in the structured finance market has long been debat