by Edward I. Altman, Sabri Oncu, Anjolein Schmeits, and Lawrence J. White
The three large global credit rating agencies - Moody's, Standard & Poor's, and Fitch - were central players in the subprime residential mortgage debacle of 2007-2008. Their initial overly optimistic ratings on mortgage-related securities encouraged the housing boom and bubble of 1998-2006. When house prices ceased rising and began to fall, mortgage default rates rose sharply, and the prices of the mortgage bonds cratered (as did their ratings), wreaking havoc throughout the U.S. financial system.
The Securities and Exchange Commission has already expanded its regulation of the rating agencies, and congressional legislation may well insist on more. But to understand the proper route forward, it's important to understand how we got to where we are today.