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Archive for May, 2008

Understanding the Underlying: Where do Credit Ratings Come From?

“We’re structure experts, we’re not underlying-asset experts.”

—Moody’s employee

How exactly did the credit rating agencies assign ratings on collateralized debt obligations backed by mortgages? In “Triple-A Failure” in the April 27 issue of the New York Times Magazine, Roger Lowenstein explains in detail how Moodys rated one such issue, which Lowenstein calls “Subprime XYZ”. Lowenstein’s article is notable for the insight it provides into Moody’s ratings process. The ratings agencies were not the only culprit in this crisis, but they played an important role, and the Lowenstein article helps to elucidate that role. Read more…

Categories: CDO, derivatives, ratings