The Art of Tetman Callis Barnett-Hart,Economics Close your eyes and that’ll look about right

Close your eyes and that’ll look about right

“Not only did the rating agencies fail to examine the accuracy of their own prior collateral ratings, but in many cases, they also used other agency’s ratings without checking for accuracy.  To correct for any shortcomings in the other agency’s rating methodology, they created the practice of ‘notching,’ whereby they would simply decrease the ratings of any collateral security that they did not rate by one notch.  In other words, if Moody’s rated a CDO that was composed of collateral rated BB+ by Fitch only, Moody’s would instead use a rating of BB in their own CDO model because it was not their rating.  They never went back and reanalyzed the other rating agency’s rating, conveniently assuming that decreasing it by a notch would compensate for any shortcomings in the initial risk analysis.” — Anna Katherine Barnett-Hart, “The Story of the CDO Market Meltdown: An Empirical Analysis” (footnotes omitted; emphasis in original)

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