Rating agencies' role in the financial crisis

Rating agencies evaluate the creditworthiness of financial products like mortgage-backed securities, guiding investors on risk levels. Before the 2008 financial crisis, they often gave high ratings to risky mortgage bundles, implying they were safe investments. This misled investors, encouraging excessive buying of these assets. When many borrowers defaulted on their mortgages, the value of these securities plummeted, causing massive financial losses and contributing to the crisis. In essence, rating agencies’s assessments played a significant role by amplifying risk signals that proved to be inaccurate, undermining confidence and stability in the financial system.