3. The American Financial Crisis

The core of the 2007–2008 financial market crisis has been the discovery that many securities were actually far riskier than people originally thought they were. The American financial crisis is a typical case of extended malpractice by hundreds of professionals in banks and rating agencies who created and certified as almost risk-free securities assets that were actually highly risky as the events after 2007 overwhelmingly showed. Subprime mortgage securitization models relied on assumptions and historical data that turned out to be incorrect and therefore made incorrect valuations. Because of the asymmetric information between the lender and the investor, rating agencies came on scene to provide the latter with accurate risk evaluation. However, the problem was that rating agencies are paid by the issuer not by the investor. This raised a conflict of interest, as was clearly exposed by the high credit ratings given to actually highly risky assets. The role of credit rating agencies, banks, and regulators is analyzed.