In market boom of 1998-2006. There followed, the house

In 1909, John Moody published the first publicly
analytical information that was entirely about railroad securities. Moody’s business
was followed by the Standard & Poor’s and Fitch company. These firms are the
big three credit rating agencies that are based in the US, in which credit rating
agencies (CRAs) evaluate the creditworthiness of organisations that issue debt
in public markets. The ratings of the CRAs are made in a descending scale, for
instance AAA is the highest, then AA, A, BBB, BB, B, etc. Credit rating
agencies (CRAs) are vital in the financial markets via the production of credit
risk data and its distribution to market participants, and in financial market
regulations. Regulators, investors and issuers utilize the data given by rating
organisations in their decision-making. Propitious ratings on the bonds from the
big three credit rating agencies that securities from the subprime residential
mortgages and other debt obligations were crucial for the successful sale of
the bonds. The sale of these bonds contributed a significant underpinning of
the self-reinforcing price rise bubble in the US housing market boom of
1998-2006. There followed, the house prices of the US belayed rising in mid-2006
and then commence to downgrade, resulting that many mortgage borrowers were not
able to pay their mortgages and started defaulting. Due to this, the prices of
mortgage bonds collapsed and this lead to a drop-in housing prices into the
credit crisis in the US and global financial systems. Rating agencies have been
criticized for their role in the credit crisis which started in 2007. More recently,
CRAs have been criticised for the downturn of European sovereigns due to the
fiscal problems of countries like Greece, Ireland, Portugal, Spain and Cyprus. Securitization,
or structured finance, is a procedure where by an entity pools together its
interests in recognisable cash flows and afterwards sells them to investors as
securities. In securitization, cash flows are repackaged in order to look more
attractive to the market. Thus, in a perfect and complete market this should
not happen since a set of cash flows should be identical regardless of how it
is packaged. Securitization, can only be attractive if it makes the market more
complete or affects some market imperfection like taxes or regulation, letting greater
cash flows to be transported to depositors. However, considering the role of
rating agencies in securitization claim that managers of the securitizations of
subprime mortgages were occupied in a form of ratings arbitrage.