Comments on: Did the Credit Ratings System Lead to Economic Crisis? http://www.ritholtz.com/blog/2009/02/did-the-credit-ratings-system-lead-to-economic-crisis/ Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media Wed, 15 Feb 2012 00:33:57 +0000 hourly 1 http://wordpress.org/?v=3.0.5 By: David Merkel http://www.ritholtz.com/blog/2009/02/did-the-credit-ratings-system-lead-to-economic-crisis/comment-page-1/#comment-146195 David Merkel Tue, 17 Feb 2009 02:07:07 +0000 http://www.ritholtz.com/blog/?p=19190#comment-146195 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. 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.

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