Have Credit Rating Agencies Got a Role in Triggering 2007 Global Financial Crisis?

The efforts for understanding the 2007 Global Financial Crisis requires more elaborated studies on the institutions, processes and other micro foundations of financial services industry instead of studies solely on mainstream business cycles theories that have obviously failed in understanding, explaining and predicting the crisis. This paper attempts to investigate whether or not credit rating agencies had played a triggering role in 2007 Global Financial Crisis. It is a study of parties, institutions and processes within financial services market. It is well documented that the credit rating agencies whose main function is to provide investors with information about the credit-worthiness of securities on which they plan to invest had hardly ever performed that function properly during the crisis. By changing their business models from ‘investor pays model’ to ‘issuer pays model’, they paved the way to conflict of interest and inevitably created chaos in financial services industry. Credit rating agencies doubtlessly are responsible for triggering the 2007 Global Financial Crisis. However it should be fair to emphasize also the responsibility of the US regulatory processes in emerging the conflict of interest in credit rating industry by giving some credit rating agencies an oligopoly power in the credit rating market and taking their credit ratings as the basic points of reference for regulatory purposes. It is obvious that the credit rating industry needs a reform.