Credit rating agencies were subject to conflicts of interest in the subprime mortgage market because ________.
A) banks were earning large fees by underwriting the mortgage-backed securities
B) they had little incentives to make sure that the mortgage was a good credit risk
C) they had weak incentives to make sure that the holders of the securities would be paid back
D) they were earning fees from rating the mortgage-backed securities and from advising clients on how to structure the securities to get the highest ratings

Question

Quizplus · Accepted Answer

Credit rating agencies had a conflict of interest in the subprime mortgage market because they were earning fees from rating the mortgage-backed securities and from advising clients on how to structure the securities to get the highest ratings. This created a situation where the rating agencies had weak incentives to make sure that the mortgage was a good credit risk and that the holders of the securities would be paid back. Additionally, banks were earning large fees by underwriting the mortgage-backed securities, further perpetuating the conflicts of interest in the market.

Credit Rating Agencies Were Subject to Conflicts of Interest in the Subprime