The overrating of mortgage-backed securities prior to the financial crash of 2007-2009 was (were):
A) moral hazard.
B) the principal-agent problem.
C) mutually beneficial trades.
D) adverse selection.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes excessive risks because they know they will be protected by another party. In the case of the financial crash of 2007-2009, the overrating of mortgage-backed securities by credit rating agencies was a form of moral hazard because the agencies knew that they would be protected by the government if the securities defaulted.

The Overrating of Mortgage-Backed Securities Prior to the Financial Crash