...credit rating agencies such as Standard and Poor’s and Moody’s in promoting well-functioning capital markets. How well are the agencies performing their roles?” – December 2013 past paper Credit rating agencies are private profit oriented entities that earn revenues for issuing opinions on the credit worthiness of sovereign governments, corporations and a variety of specific debt issues and issuers. They enjoy a high level of credibility in the investment community and their opinions are extremely influential. Credit rating agencies first emerged in the United States in 1909. They initially issued ratings solely for the debt obligations of the railroad, which had catalysed the development of a global bond market to finance their expansion. The advent of credit rating agencies in the early 20th Century reflected the emergence of highly capital intensive industries in the USA and the corresponding expansion of capital markers to finance them. Over recent decades, global capital flows have accelerated as sovereign borrowers, notably in the developing world, turn to private capital markets for financing needs previously met by commercial and development banks, as well as multilateral agencies. The two major credit rating agencies are Standard and Poor’s and Moody’s Corporation. Standard and Poor’s is now a wholly owned subsidiary of the McGraw Hill Group of companies,, while Moody’s Corporation is the parent company of Moody’s Investor Services. Credit rating agencies...
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...Introduction Credit rating agencies play a key role in todays and the last century’s financial life. Their function is to analyze and then publish country’s and firm’s or basically any financial entity’s/product’s creditworthiness. However, their defining impact on today’s economics is goes way beyond their definition. The Three Big, Moody’s, S&P and Fitch are in possession of 95% market share, that means the competition is negligible. The lack of competition multiplies their individual effect on the markets and raises the question of whether they work with the moral standards today’s stakeholders are expecting from them. (The Role Played by Credit Rating Agencies in the Financial Crisis, Asian Development Bank Institute, 2012) Major investors and creditors are knowingly deciding about their financial moves based on a very narrow and far from comprehensive information. The three bigs ratings are certainly part of these data and they do have major consequences on whether a company will invest in a certain country or on what terms will a bank lend capital to a given enterprise. If we go even further, we can see that credit ratings will have impact on a country’s fiscal and monetary policies, industries’ success or in many case failure, and through that, on people’s everyday life and economic well-being. Now that the concept of ratings are not so abstract, let’s take a look at how they relate to the financial crises. The 2007 credit crisis were caused by the overvaluation...
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...happiness and excitement flourished over me because there was a bright–blue pool and extensive backyard waiting for me in Florida. My family was optimistic about the move and I was ecstatic about my new house. At the time, everything in my family’s life seemed to be going well. However, no one in my family was expecting for our innocent, beautiful home on the corner of a cul-de-sac to become a financial burden that would affect my dad till this day....
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...Global Lessons from the Recent Financial Crisis: Need for Reforms Jason Khan – 212857264 Yiwen Shen – 212828810 Alexander Grynszpan – 212811618 Xueyan wu - 212828380 INTRODUCTION Mortgage Backed Securities Lack of Regulations in the Banking System Lack of Regulations in the Credit Rating Agencies Subprime Mortgages Financial Crisis of 2007-2009 Lack of Regulations of over-thecounter derivatives Introduction to the Financial Crisis Causes of the Financial Crisis Reforms introduced International response Conclusion Cause: Subprime Mortgage - Housing prices were on the rise à More difficult for consumers to purchase - Investment banks purchased the mortgages from individual lenders, re-packaged them, and sold them to an even larger quantity of small and large investors - Borrowed money to magnify the outcome à Created collateral debt obligations (CDO) - Mortgages were sometimes given without down payments, or assurance of repayments - When the housing bubble “popped”, investment banks held massive debts without means of paying them à led to declaration of bankruptcy Introduction to the Financial Crisis Causes of the Financial Crisis Reforms introduced International response Conclusion Cause: Mortgage backed securities - Important players in the Crisis: Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC), or as known as Fanny Mae ad Freddy Mac - Through mortgage backed...
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...UID: 3035198791 Name: Ho Hei Man Course: CCGL 9030 The Credit Crisis of 2008 1.Introduction In the fall of 2008, a financial crisis originated from the U.S. resulted in losing trillions wealth, which affected not only U.S. itself, but all over the world. In this paper, I discuss factors leading to the credit crisis in 2008, explain policies that could have prevented it from happening, and state which of the proposed plans for reforming the financial industry would have the best chance of succeeding. The disscussion of this report is mainly based on the HBS report on the financial crisis. 2.Factors led to the credit crisis This section discusses the factors led to the credit crisis. 2.1 Low interest rate Since there was a relatively low interest rate for borrowing money from the US federal reserve because of the US government policy and foreign money from the ‘savings glut’ like China, Japan and Germany flowing to US, it resulted in relaxed credit conditions which banks and home buyers from the US can then borrow money easily. Thus, easy credits fuelled both hosing and credits bubbles. Low interest rates made mortgage payment cheaper, and it drove up the demand for homes, which helped in pushing up the housing prices. As the rapid increase in hosing prices, more and more borrowers to be priced...
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...Collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS).[1] Originally developed for the corporate debt markets, over time CDOs evolved to encompass the mortgage and mortgage-backed security ("MBS") markets.[2] Like other private label securities backed by assets, a CDO can be thought of as a promise to pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. The CDO is "sliced" into "tranches", which "catch" the cash flow of interest and principal payments in sequence based on seniority.[3] If some loans default and the cash collected by the CDO is insufficient to pay all of its investors, those in the lowest, most "junior" tranches suffer losses first. The last to lose payment from default are the safest, most senior tranches. Consequently coupon payments (and interest rates) vary by tranche with the safest/most senior tranches paying the lowest and the lowest tranches paying the highest rates to compensate for higher default risk. As an example, a CDO might issue the following tranches in order of safeness: Senior AAA (sometimes known as "super senior"); Junior AAA; AA; A; BBB; Residual.[4] Separate special purpose entities—rather than the parent investment bank—issue the CDOs and pay interest to investors. As CDOs developed, some sponsors repackaged tranches into yet another iteration, known as "CDO-squared" or "CDOs of CDOs."[4] In the...
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...Research Proposal: Finance; (Financial Engineering, Financial Mathematics & Risk Management) By:Syed Asad Raza Naqvi Index Introduction and Background………………………………………………………………………….3 Interested areas for research and further study (Research Proposal)……………….3 Further explanation of the intended research topics………………………………………..4 Securitization…………………………………………………………………………………………………..4 Credit Derivatives…………………………………………………………………………………………….6 Hybrid Products……………………………………………………………………………………………….7 Re-Securitization……………………………………………………………………………………………..8 Contribution of these products towards Financial Crisis…………………………………..8 Improper Risk Management role in Financial Crisis………………………………………….9 Risks………………………………………………………………………………………………………………..10 Market Risk……………………………………………………………………………………………………..11 Credit Risk……………………………………………………………………………………………………….11 Liquidity Risk……………………………………………………………………………………………………11 Interest Rates and the Financial Crisis………………………………………………………………12 Relation between low interest rate and financial crisis…………………………………….12 Role of Rating Agencies……………………………………………………………………………………14 Structure Finance Products and Rating Agencies……………………………………………..14 Regulations Then and Now………………………………………………………………………………15 BASEL II……………………………………………………………………………………………………………16 Enhancements of Basel II…………………………………………………………………………………18 The Resecuritisation Exposure Using IRB Approach………………………………………….18 The Resecuritisation Exposure Using Standardized Approach…………………………...
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...1. Jules Kroll is planning to enter the credit ratings business. Is this a good idea? Is this a good time? Why? We suggest it is a good time but not a good idea for Jules Kroll to enter the credit ratings business. In order to know whether it is right for him to do so, we have used SWOT analysis to see the feasibility of this plan. Strength Jules B. Kroll — the leader of Kroll Bond Rating Agency, is the formidable strength for them to enter this new industry by his successful business career and abundant experience as an entrepreneur. Few people ever penetrate the dark side of money, but Jules Kroll is one of them. He has done all his life to look under the covers. The previous success and reputation of the Kroll corporate intelligence firm and K2 Global Partners can help Kroll Bond Rating Agency stepping into spotlight, while give public confidence that Jules Kroll could break into such a tough industry. Weakness Credit rating business is brand new field to Jules Kroll. He must do a lot of preparations to meet the requirements — a large amount of qualified experts, which would be a key to success; interest from users and issuers; NRSRO designation; investors who can help developing the financial viability of the project. Startup companies lack the geographical reach and industry expertise of the established players. It is costly and time consuming to recruit prominent staff of credit rating industry, and it is also hard for Kroll to attract users and issuers since majority...
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...large institutions and escaped serious regulation. This lack of legislative control played a great part in allowing the credit default swaps on subprime mortgage bonds, CDO’s, and the eventual collapse of the subprime market. Following the subprime mortgage crisis, the Department of the Treasury released a new regulatory plan, The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure, which is referred to as “the Paulson Plan.” The Paulson Plan was completed in March 2008 and consisted of a series of short-term and intermediate-term recommendations that were meant to immediately improve and reform the U.S. regulatory structure. The short term recommendations included: modernization of the current President’s Working Group on Financial Markets Executive Order, the creation of a new federal commission, the Mortgage Origination Commission, whose purpose is to evaluate, rate, and report on the adequacy of each state’s system for licensing and regulating participants in the mortgage origination process, and the Federal Reserve provide liquidity to the financial system. These short term recommendations were intended to improve regulatory coordination and oversight to avoid a financial crisis, while the intermediate recommendations focused on modernizing the regulatory structure. The intermediate recommendations included: phasing out the federal thrift charter and transitioning to a national bank charter, direct federal supervision of state-chartered...
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...Rating agencies and their excessive power: Why are they so powerful? By Nadezhda Peneva American University in Bulgaria, EMBA, Cohort 13 NIP147@aubg.bg March 21, 2014 Abstract The paper is set out to find out the influence of credit rating agencies on the business and the national policies as well as to elaborate on how powerful are they for the society and why. Over 100 years rating agencies demonstrate excessive power, but is this just an assumption or it could be a strong conclusion? In the paper the role and power of the rating agencies like Standard and Poor’s, Moody’s and Fitch would be defined and assessed. 1. Introduction Credit Rating Agencies (CRAs) could be generally defined as „providers of opinions about the creditworthiness of companies and countries which have become very important players in financial markets due to growth in Capital Markets, Credit Derivative Markets, Globalisation of Capital Markets; and an increase in Regulatory Use of Ratings” (Ryan, 2012). Here comes the question: Why actually they have become very important players globally? CRAs are companies who assign credit ratings for the debt of public and private companies who are issuers of certain types of debt obligations and also CRAs assign credit ratings for debt instruments themselves. Usually the issuers of securities are companies, governments, NGOs and entities with special purposes or national governments...
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...Università degli studi di torino | Rating agencies and financial speculation | An analysis of the protagonists of the world market | | Elisa Valenti | Matricola 711323 | | INDEX The protagonists of the world market | 2 | A particular source of power: rating agencies and country rating | 2 | Conflict of interest? | 4 | Other issues of concern * Barriers to entry and lack of competition * Transparency | 555 | The importance of reputation | 6 | What went wrong? | 7 | The need for regulation | 7 | Can we trust the rating agencies? * The Enron Case Study * The Parmalat Case Study | 889 | Are rating agencies guilty? | 12 | The sinister power of rating agencies | 13 | A world without rating agencies | 14 | Conclusions | 15 | References | 16 | The protagonists of the world market A rating agency is a private firm which publicly evaluates a company capacity to repay the debt issued. This capacity is classified using a scale that goes from a maximum of AAA and a minimum of DDD. Obviously the evaluation received influences the interests that a company has to pay to receive credit. Today the rating market is controlled by three giants, the so called “three sisters”: Moody’s Investor Service, Standard & Poor’s and Fitch . Till the 70s rating agencies were not making high profits, but today they are extremely relevant such that in 1996 the New York Times was writing that there were just two powers in the world, the United...
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...behind the financial crisis will take decades to develop. If the Great Depression is any guide, studies of what really caused this crisis will occupy economists’ minds for a long time to come. The crisis started in the US and spread through financial and real economic channels to the rest of the world but countries with weak initial economic position were hit the worst. Some causes of the crisis can thus be found in the macroeconomic policies of the past years. However, failures in the financial system, particularly in the US, were at the root of the problem. In the following we try to explain some of the most important causes of the crisis. 1. Financial market causes a. Financial Innovation: The term financial innovation refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure (such as the default of a borrower) or to assist with obtaining financing. The dramatic expansion in the use of financial products leads up to the crisis. Examples pertinent to this crisis included: the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO) for sale to investors, a type of securitization; and a form of credit insurance called credit default swaps(CDS). These products vary in complexity and the ease with which they can be valued on the books of financial institutions. Another financial innovation...
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...The rise and fall of structured finance Abstract The financial crisis of the year 2007 and 2008 saw the world affected negatively with the economy affected adversely (Smith & Mendoza, 2011). Several scores have been directed to increased demand in the housing sector while other have resulted in concluding it was the failure of the financial regulation authorities. The severe effect caused the United States economy job market loss approximately 8 million workers as the inflation rate declined to near zero. The main purpose of the paper is to give clear insights of what caused the increase in the structured finance market and eventually its fall. In this study, the researcher set out to show that only securities that exhibited confidence when underlying them and how they attracted investors by making them appear as high paying. The study will also go an extra mile in explaining the correlation that is existing in the financial market components. Applying the structured prototype in security of finance, the researcher uses CDO (collateralized debt obligation) in illustrating that issuance of capital structure increases the likelihood occurrence of under evaluating of underlying securities and evaluation of risks. The researcher obtains data from secondary sources and Wall Street Journals. The results obtained indicated that credit rating agencies over rated their credits against collateral securities leading to miscalculation and wrong presumptions that saw the economy rise...
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...aftermath of the financial crisis of 2007, there has been a great deal of debate regarding the key underlying causes. For example, when people discuss the collapse of the financial markets, the most frequently mentioned word is subprime mortgagewhich is considered as the culprit of the crisis. Yet, is subprime mortgage the root of the crisis? If it was, then the question would be how this type of financial product, which is only marginal part of the financial market, could cause such a catastrophic crisis. Specifically, systemic risk was developed. Essentially, subprime mortgage is a mere part of superficial reasons of the crisis and was induced by other underlying factors which will be discussed in the essay. Due to the current situation, it is necessary to correct such misunderstandings. According to the statistics issued by the National Bureau of Statistics of China, GDP growth rate of China has dropped from nearly 12 per cent three years ago to a more subdued 7.5 per cent in the second quarter. Despite a year and a half of recession, Euro zone’s GDP rose at an annualised rate of 1.1 per cent in the second quarter, this pickup still leaves GDP across the Euro area 0.7 per cent lower than a year ago (The Economist, 2013). This essay will argue that in order to resolve the current economic problems it is crucial to identify the underlying causes rather than accepting superficial reasons. It will also be argued that there are three key reasons for the crisis: monetary policy...
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...CDS market and states the regulation reform after the crisis. Part I is background, generally introduces the Wall Street crisis. How it happened? What consequence it has? Part II is mainly about AIG’s CDS business: how AIG got involved in the crisis and why the biggest world insurance company suddenly collapsed. Part III is about credit default swaps: definition, construction, and problems. Part IV is concerned on the regulation reform after AIG’s failure. Wall Street Crisis Speaking of the Wall Street crisis, people all know it proceed from subprime crisis. The relatively low interest rate prompts banks to issue large amount of housing loans. To transfer default risk embedded in those loans, investment banks package those loans and mortgages into student loans, car loans and credit card debt, which form the so-called collateralized debt obligation (CDOs). All these derivatives depend on the housing loans. In the era of low interest rates, house prices rise rapidly and promote the rapid development of the housing loans business. With steady stream of housing loans into financial derivatives products, different ranks of products are packaged to sale out. The good view of economy makes those potentially risky CDOs popular with retirement funds. Lenders didn’t care anymore about whether a borrower could repay; the investment banks earned more money on selling more CDOs; the rating agencies had no liability if their ratings of CDOs prove wrong. Everyone in this securitization...
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