Financial Risk Manager Part 1

The correct answer is D because this describes the classic agency problem where credit rating agencies had a conflict of interest. They were paid by the very issuers whose products they were rating, creating an incentive to provide favorable ratings to maintain business relationships and generate higher fees. Structured financial assets (like mortgage-backed securities) were more complex and profitable for rating agencies than traditional corporate bonds, creating additional financial incentives for favorable ratings. This conflict of interest led to systematically inflated ratings that failed to accurately reflect the true risks of these securities, contributing significantly to the 2007-2008 financial crisis.