This is an excellent book that all scholars of financial crises and political economy should read. Timothy Sinclair has written a lucid, detailed, and thoroughly researched investigation of the role of U.S. ratings agencies in the global financial crisis of 2007 and beyond.

The core puzzle of the book is why the major ratings agencies remain, essentially unreformed, at the heart of Wall Street and the global financial system: “Understanding what the agencies really did, and why, and how they survived the ignominy of their involvement in the crisis is the purpose of this book” (p. 2). As Sinclair notes, the ratings agencies played a central role in the global financial crisis, yet they emerged without substantial new regulation, major changes to their business model, or losing their central role in global finance.

Why is this the case? Sinclair offers three explanations: (1) the agencies’ uncertainty about the sustainability of their business model after the 2001 Enron crisis; (2) the rise of Fitch, transforming the comfortable Moody’s–Standard & Poor’s ratings duopoly into a more competitive three-way oligopoly; and (3) the need for some agency to offer ratings and the lack of other institutions that satisfy market participants as superior alternatives. Sinclair also offers a more tentative argument about the continued dominance of what he labels the “exogenous” view of financial crises—the belief that crises are a bug, not a feature, of markets— in popular media and political discourse, which I discuss further.

As a descriptive project, this book is truly outstanding. It is clear, concise, very well written, and rich with qualitative evidence from Sinclair’s meticulous research and interviews. Chapter 4—which explains what structured finance, securitization, and repurchasing agreements (“repo”) are, the ratings agencies’ role in them before and during the global financial crisis, and how these came together to trigger the collapse of Lehman Brothers and the broader crisis in 2008—is perhaps the clearest explanation I have read anywhere on these issues. Likewise, Sinclair’s in-depth chronology and analysis—including detailed recaps of congressional hearings on the ratings agencies during the crisis—is superlative. Chapter 6 also includes excellent discussions of the role of the ratings agencies in the Eurozone crisis and why calls for greater financial transparency are red herrings in the search for increased financial stability. These are sections of the book that will serve as outstanding readings for many years on both undergraduate and graduate syllabi in international political economy (IPE) courses.

That said, I found the book’s theoretical argument less compelling. Sinclair spends a good deal of time knocking down what he frames as the stock explanation of the crisis. In this view, “the ratings agencies were the key players in the germination of the financial crisis,” “providing inflated ratings for the bonds associated with subprime lending” (p. 6). The key here, Sinclair argues, is that this view treats financial stability as the norm, and financial crises as the exception, brought on by greed and bad behavior: “crises can only occur because people do bad or illegal things, or because there is some defect or ‘failure’ in institutions, perhaps caused by government. Crises are therefore exogenous to markets, reflecting problems external to them” (p. 8). In contrast, Sinclair proposes an alternative view, in which “crisis is a normal, if not daily, event in financial markets” (p. 8) and one that is “endogenous” to the structure of markets themselves.

This is true, as far as it goes. The “bad actors” argument surely is the popular conventional wisdom. But I do not think it is the dominant explanation among IPE scholars. Indeed, IPE scholars and economists of many stripes have recognized for decades that market failures exist and are an inherent part of finance. The causal story here—a search for yield driving flows into structured finance in the United States, creating a bubble in subprime lending and collateralized debt obligations (CDOs) that eventually burst, bringing down Lehman Brothers and triggering a global financial freeze—is one now widely recognized as the key narrative of the global financial crisis.

Ultimately, Sinclair’s critique of “market-centered approaches” boils down to “economists and financial market scholars don’t pay enough attention to politics.” I fully agree. But that tells us little about the political economy of the ratings agencies. Certainly, “populist views” on ratings agencies are simplistic in understanding the distributional consequences and politics of financial crises. But this is something of a straw man. IPE scholars of all bents surely agree that these approaches have major limitations and ignore politics at their peril. I wished more time had been spent instead engaging with the work of materialist political economy scholars on crises and policy responses to them, which highlights the importance of domestic interests and institutions and their material distributional consequences.

That said, I share Sinclair’s critique of critical theorists’ approach to ratings agencies: “not taking the agencies and what they do seriously enough. If they are just another institution of capitalism…why bother studying the agencies themselves” (p. 72). Indeed, just as we cannot understand the political economy of the global financial crisis by looking for bad individual actors alone, we also cannot really understand it simply as a structural feature of a failed capitalist system, as critical theorists argue. Focusing on key actors, institutions, and strategic interaction between them is crucial for explaining how and why crises occur and the policy responses to them.

I also agree with Sinclair’s view, articulated in his “social foundations” approach, that “purely materialist explanations for the existence of the ratings agencies are deceptive” (p. 73). And I found his discussion of how and why social and ideational variables matter compelling. However, I think few serious IPE scholars would disagree with Sinclair’s claims that both ideas, beliefs, and social facts (on the one hand) and material factors (on the other) “matter” in explaining the ratings agencies’ role and importance in the events of the global financial crisis.

Instead, the main point of disagreement among IPE scholars, surely, is about the relative importance of social and material factors. Here, I found the book less convincing. For example, Sinclair returns repeatedly to the importance of there being three main ratings agencies, rather than two or many, and he identifies market competition and material incentives among Fitch, S&P, and Moody’s as key factors shaping their behavior after 2001. Yet the empirical portions of the book do not tell us exactly how important this competition was, relative to the ideas, beliefs, and perceptions that Sinclair argues are central explanatory variables.

Elsewhere, Sinclair argues that there is a “two-pronged explanation” for why the ratings agencies have persisted in their role: (1) the lack of better institutions to solve the information problems of disintermediated capital markets and (2) the continuing dominance of the Big Three. I am again quite convinced he is right on both accounts. But there is no real test of the relative importance of these two factors, nor is there a test of the degree to which the Big Three’s continued dominance is due primarily to market actors’ beliefs that some judgments carry more weight than others or whether it is due mainly to material political economy factors about the competitive environment.

Thus, when Sinclair concludes that we must “reject the dominant market-centered understanding of ratings and embrace the social foundations understanding advocated in this book,” I am not fully convinced (p. 164). I do not believe that his book has settled the debate about the relative importance of ideational versus material factors in driving the political economy of ratings agencies. Unquestionably, both “matter.” But the extent to which each matters—both in the case of the ratings agencies and more broadly in the political economy of financial crises—requires further research.

Finally, in chapter 7, Sinclair argues against what he labels the “exogenous” view of financial crises, which he claims sees crises as the result of individual villains (“the bad guy in the black hat”) and institutions “outside of finance” (pp. 166–67). In this exogenous view, he notes, “Financial crisis is a deviation from the normal state of the market” (p. 171). Sinclair contrasts this with “the endogenous account,” in which “financial crises begin with finance itself” (p. 172). Here, I agree with Sinclair that finance itself is the problem. But I disagree with his conclusion about what structural factors of finance are most important in causing financial instability. For Sinclair, the problem is “the important role of extreme forms of financial innovation,” as epitomized in both the Enron episode and the structured financial instruments of the 2007 financial crisis (p. 176). But this overlooks the most important structural feature of “finance” that has been the problem in the global economy for decades: capital mobility. Since the collapse of Bretton Woods, there has been unprecedented financial liberalization and a more than 30-fold increase in the magnitude of cross-border capital flows. The rise of global finance has brought enormous benefits in terms of growth, development, and rising living standards in many parts of the world. And yet, just as the pre-World War I and interwar eras were characterized by both capital mobility and frequent financial crises, so, too, the return of capital mobility has been characterized by waves of banking, currency, and sovereign debt crises.

Few of these crises, however, have been driven mainly by financial innovation. Instead, from Latin America in the 1980s to East Asia in the 1990s to Europe in the 2010s, most of the post-Bretton Woods financial crises have been quite straightforwardly banking, sovereign debt, and bond financing crises. The common threads across these crises have been the magnitude and reversal of large cross-border private capital flows, not complex financial innovation.

In sum, although I agree with Sinclair that the “exogenous” approach to financial crises remains dominant in popular discourse, I disagree with his conclusion that the relevant “endogenous” factor is financial innovation. Rather, I see the resurgence in global capital flows since Bretton Woods as a far more important explanatory variable. Nonetheless, it is quite clear in the 2007 global crisis, and perhaps in others as well, that financial innovation and complexity do matter. Future research should seek to disentangle the relative importance of these two factors, as well as the relative importance of the social and material factors that Sinclair identifies as the key components of his social foundations approach. Scholars engaging in that work will find Sinclair’s book essential reading, and his outstanding account of the ratings agencies’ role in the 2007 crisis will remain important and relevant for years to come. This is an excellent book. I recommend it highly.