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The Key Intigators Of The Financial Crisis Of 2008

486 Words2 Pages

In this class, I have learned a lot about financial institutions, their management functions, and real world events that both corroborate and refute financial institution policy used to govern and stabilize the economy. The Financial Crisis of 2008 happens to be one of the largest crises to occur during my lifetime, so it is no surprise that one piece of information I learned in class, that I believe I will be likely to remember five years from now, is in regards to this crisis. This piece of information is how badly constructed incentive plans and poor governance lead credit rating agencies to be one of the key instigators of the Financial Crisis. In this response, I will discuss why I believe myself likely to remember this fact and how I could practically apply it in my personal or professional life. …show more content…

By misrating securities, the rating agencies were driving demand for securities they new were risky. This was a slippery slope, because they were establishing expectations and were incentivized to continue to overrate securities. This was one of the big factors in driving the demand for mortgages, even those that were subprime. Additionally, mezzanine tranches, that were already overrated, were being repurchased and put into a CDO-squared and rating agencies would still rate the highest tranche as AAA. These are just some examples of how improper influence due to considerations regarding fees, market share, profits, and relationships with issuers can lead to very negative

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