When Trust Makes It Worse—Rating Agencies as Disembedded Service Systems in the U.S. Financial Crisis

Abstract

Rating agencies provide service by offering information about different kinds of securities and/or investment opportunities. This paper addresses questions often asked during the 2008 U.S. financial crisis: Why did no one see this coming? Why were all the explanations given afterward, not given before as precautions? Or if they were given before, why did nobody listen? Using Giddens' idea of disembedded systems [Giddens A (1991a) The Consequences of Modernity (Polity Press, Cambridge, UK)], the paper describes and frames the phenomenon of U.S. financial crisis and the role of rating agencies in particular as a disembedded service system. Hereby it offers an explanation of the crises in contrast to the common incentive-oriented or moralizing perspectives. The paper shows that the U.S. financial crisis emerged from a disembedded service system, a simulacrum of ratings, which after a while was no more connected to the reality of securities. Information-providing service systems are in danger to become simulacra, and with it they can disembed. The paper offers a new insightful perspective on how to analyze and understand information-providing service systems and hence offers a perspective to avoid crises based on disembedded systems. This is the first paper to our knowledge to analyze information-providing service systems based on Giddens' theory of abstract disembedded systems. It provides a new understanding of information-providing service systems that can help to avoid crises based on disembedded systems.