what ethical issues may arise because the companies that issue bonds pay the rating agencies to rate their bonds ??

focus on ETHICS Can We Trust the Bond Raters? in practice Moody's Investors Ser subprime crisis. The agencies attached could create investment grade securities woe, Standard & ratings to complex securities that did not out of nisky mortgage loans? Did the Poor's, and Fitch Ratings play a crucial reflect the true risk of the underlying in agencies understand the securities they role in the financial markets. These vestments. For example, securines were rating? Were they unduly intu- creditating ogencies evaluate and at backed by mortgages issued to borrowenced by the security issuers, who also toch ratings to credit instruments (for ex ers with bad credit and no documented happened to pay for the ratings Ap- ample, bonds). Historically, bonds that Income oken received investment grode parently, come within the rating ogen received higher ratings were almost at ratings that implied almost zero probo- cies were suspicious In a December ways repaid, whereas lowerrated, bility of default. However, when home 2006 email exchange between cot more speculative "junk" bonds experi- prices began to decline in 2006 secur leagues at Standard & Poor's, one indir enced much higher default rates The rities backed by risky mortgages did de vidual proclaimed "let's hope we are agencies ratings have a direct impact fault, including many that had been all wealthy and retired by the time this on firms costs of raising external copitol rated investment grade house of cards falters * and Investors' appraisals of fixed in It is not entirely clear why the rating What ethical issues may arise be ogencies assigned such high ratings to Recently, the creditating agencies these securities Did the agencies be cause the companies that issue have been criticized for their role in the lieve that complex financial engineering bonds pay the rating agencies to rate their bonds? come investments