The Security and Exchange Commission’s solution to inflated credit ratings failed, according to recent analysis.
The 2008 financial crisis was brought in part by the inflated and optimistic credit ratings of mortgaged backed bonds. The crash led investors losing a total of $410 billion, according to the Federal Reserve Bank of Philadelphia. After the crash, the SEC resolved to commit actions that would prevent inflated ratings from proliferating again.
Inflated ratings occurred because credit ratings firms are paid by the entities whose bonds they are rating. The SEC believed that unsolicited ratings could hold credit ratings firms accountable. A credit ratings firm could provide their own rating, despite not being paid by the evaluated entity. If this rating differed from the original rating, then a red flag would be raised. However, since the implementation of this amendment a decade ago, not one unsolicited rating has been published.
What’s even more worrying is that inflated credit ratings have been on the rise recently. Presidential candidate, Senator Elizabeth Warren sent a letter to the SEC highlighting the organizations failure to devise a new business model for credit ratings firms.