Meanwhile, banks’ executive management and risk management staff were in a weaker position to evaluate and control the operations of portfolio managers. Ratings assigned by rating agencies to exotic products were not called into question, despite the raters’ own agency problems. Supervisors were also less able to scrutinise bank balance sheets and understand the risks.
Overall, controls in financial markets slackened and risk-taking at others’ expense flourished. Distorted incentives sped up the process. Later, in depths of the crisis, when financial institutions encountered problems, the same lack of transparency prevented an understanding of the scope and nature of the systemic links between financial institutions. Decisions on rescue operations had to be made in a hurry and often in blindfolds.