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The incompetence of credit rating agencies from "summary" of The Big Short: Inside the Doomsday Machine (movie tie-in) by Michael Lewis
Credit rating agencies were the supposed experts who were supposed to assess the risk of mortgage-backed securities. They were supposed to provide unbiased evaluations of the likelihood that these securities would be repaid. However, what was revealed during the financial crisis was that these agencies were far from competent in fulfilling their responsibilities. The incompetence of credit rating agencies was evident in their lack of understanding of the complex financial instruments they were supposed to be evaluating. They relied on flawed models and assumptions that failed to account for the true risks inherent in these securities. This led to a gross underestimation of the potential for default, which ultimately contributed to the collapse of the housing market and the subsequent financial crisis. Furthermore, the credit rating agencies were also compromised by conflicts of interest. They were being paid by the very institutions whose securities they were rating, creating a situation where their judgments were clouded by financial incentives. This conflict of interest led them to give inflated ratings to toxic assets, further perpetuating the bubble that eventually burst. The incompetence of credit rating agencies had far-reaching consequences, as their flawed assessments led investors to place unwarranted trust in these securities. This misplaced faith in the ratings provided by these agencies fueled the demand for mortgage-backed securities, creating a false sense of security that ultimately proved disastrous. In the end, the incompetence of credit rating agencies served as a stark reminder of the dangers of relying on flawed systems and institutions. Their failures played a significant role in the financial crisis, highlighting the need for greater transparency, oversight, and accountability in the financial industry.
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