Credit ratings, bond insurance were no protection in 2008 crisis

SOME of the proposals that the retail bonds working group is studying seem to be mechanisms that were in place in the United States more than a decade ago, but which not only did little to stop the 2008 global financial crisis (GFC) from unfurling, but even played a significant role in contributing to the crisis.

One example is credit ratings. The working group is mulling the requirement of a minimum credit rating for the bonds or their issuers in order to protect retail investors, many of whom would gladly plunge their savings into issuances simply based on their familiarity with the issuer's name.

In the GFC, many retail investors likewise based their investment decisions on ratings, putting their money in structured products that became worthless pieces of paper when the housing bubble burst. Credit ratings agencies had been part of the problem because they gave the seal of approval to these products for purchase even by less-savvy retail investors.