Avinash Persaud, founder and Chairman of Intelligence Capital, discusses regulatory solutions that would avoid this happening next time: Lending to a Credit Rating

The credit rating section begins at ~22 minute

Gresham College, Running time 51 min 45 sec

One of the puzzles of the 2007/8 credit crunch is how a relatively small loss of capital in a tiny market segment was transformed into a global financial crisis costing close to $1 trillion and sending the world economy into slowdown.

Key players in this tragedy are a set of legal and accounting principles that are well-meaning, but turn financial hiccups into liquidity black holes.

Category: Bailouts, Credit, Regulation, Video

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One Response to “Did the Credit Ratings System Lead to Economic Crisis?”

  1. David Merkel says:

    The puzzle resulted from overvalued assets that were mainly debt-financed. Too many levered investment entities were playing near or past their leverage limits for an ordinary market. When asset cash flows could no longer carry the debt, a self -reinforcing cycle of falling asset prices began, leading to a variety of defaults in the financial sector, beginning with smaller, relatively simple highly levered lightly regulated entities, and moved on to larger, more regulated, more complex entities, some of which seemed not to be so highly levered.

    Too many layers of debt; too much debt complexity… it was like dominoes waiting to be knocked over.