1. Credit rating agencies present one of the key problems in reconfiguring the global financial architecture. Why? What are the options? What is the most likely solution? * The rating agencies present one of the key problems because they were behind the rating of the complex CDOs as well as taking an active part in creating these mortgage-related products which created conflict of interest. The ratings given to the CDO tranches did not effectively disclose the true credit quality of the underlying securities which contained a much higher default probabilities.
* More regulations by SEC to control the “issuer pays” model. * “To correct the competition problem within the “issuer pays” model, the SEC could place limits on the competition that occurs among the rating agencies.” (Acharya & Richardson, 2009) * “An alternative structure (…) would be for the SEC to create a department that houses a centralized clearing platform for rating agencies.” (Acharya & Richardson, 2009) * Another option is to deregulate the industry and allow free-market competition forces to shape its further growth and development which could bring in players like Bloomberg that would offer bond rating as a value-added services to its clientele. * Most likely solution:
* Although it is a very complex situation and it would require a series of regulatory changes, a regulatory oversight agency that would closely monitor the rating agencies and act as an intermediary in matching the issuers with the rating agencies.
2. Greece is in trouble. Why? Fast-forward 5 years and describe the most likely outcome of the current problems and their consequences for global banking and financial markets. * Greece is in trouble because it has failed to keep under controls its ballooning debt and accumulated a total national debt of over 113% of the country’s GDP. In April and May of this year Greece has to repay a total of $23 billion of its...
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