Credit rating agencies and the subprime crisis
Okay kiddo, have you ever borrowed money from a friend or family member and promised to pay them back later? Well, grown-ups and big companies do that too, but in a much bigger way. They borrow money from banks and other lenders but the amount they borrow is a lot more than what you borrow from your friend.
When you are borrowing money from someone, they want to know if you are trustworthy and if you will be able to pay them back the money that you borrowed. The grown-ups and companies also need to prove to their lenders that they are responsible enough to pay back the money they borrowed.
That's where credit rating agencies come in. Credit rating agencies are like the teachers who grade your homework, and in this case, they grade how good grown-ups and companies are at repaying the borrowed money. They give a credit rating to the grown-ups and companies based on how likely they are to pay back the money.
Now, here comes the subprime crisis part. In the past, some grown-ups and companies were given high credit ratings even though they were not very good at repaying the money they borrowed. They got this high rating because they had promised to pay back the money using something called a mortgage.
A mortgage is when someone borrows money to buy a house, and they promise to pay it back over a long period of time. But some people who were given high credit ratings got greedy and instead of getting a mortgage for a house they could afford, they got a mortgage for a very expensive house, thinking they would be able to pay it back eventually. Unfortunately, they started missing their monthly payments, and the banks that lent the money didn't get their money back.
This caused a big problem in the economy and led to many banks losing a lot of money. In the end, the credit rating agencies were criticized for giving high ratings to companies and grown-ups who were not very good at repaying the money they borrowed.
When you are borrowing money from someone, they want to know if you are trustworthy and if you will be able to pay them back the money that you borrowed. The grown-ups and companies also need to prove to their lenders that they are responsible enough to pay back the money they borrowed.
That's where credit rating agencies come in. Credit rating agencies are like the teachers who grade your homework, and in this case, they grade how good grown-ups and companies are at repaying the borrowed money. They give a credit rating to the grown-ups and companies based on how likely they are to pay back the money.
Now, here comes the subprime crisis part. In the past, some grown-ups and companies were given high credit ratings even though they were not very good at repaying the money they borrowed. They got this high rating because they had promised to pay back the money using something called a mortgage.
A mortgage is when someone borrows money to buy a house, and they promise to pay it back over a long period of time. But some people who were given high credit ratings got greedy and instead of getting a mortgage for a house they could afford, they got a mortgage for a very expensive house, thinking they would be able to pay it back eventually. Unfortunately, they started missing their monthly payments, and the banks that lent the money didn't get their money back.
This caused a big problem in the economy and led to many banks losing a lot of money. In the end, the credit rating agencies were criticized for giving high ratings to companies and grown-ups who were not very good at repaying the money they borrowed.