Date of Award

6-2011

Document Type

Open Access

Degree Name

Bachelor of Arts

Department

Economics

First Advisor

Mehmet Sener

Language

English

Keywords

credit, financial crisis, mortgage securities

Abstract

Ninety three percent of all AAA-rated subprime mortgage backed securities issued in 2006 were downgraded to junk bond status subsequent to the financial crisis. The credit rating agencies clearly failed to give the early warning signs on these and numerous financial products that went bust. This thesis investigates the role of credit rating agencies in the functioning of financial markets and proposes policy changes to reform this industry. The sources of market failures in this industry can be traced to conflicts of interest, barriers to entry, lack of accountability, and asymmetric information. I propose three possible reforms to improve the efficiency and accuracy of financial product ratings: a government-based model, a subscription-based model, and a market-based model. I provide a comparative evaluation of each model, discuss their implementability and demonstrate how they can solve the identified market imperfections.

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