Rethinking The Ratings Agency Scandal, Part IV: Homogenous Ratings Labels For Heterogeneous Credits

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At the most basic level, the critique of the ratings agencies seem to be that by assigning triple A ratings to riskier credit products, they concealed risk. This dismays the ratings agencies who believe that they never claimed every kind of credit product that bore the same label carried the same risk.
“Credit ratings are relative to the type of credit,” a credit rating official tells DealBreaker. “Different types of products have different inherent risks, and the labels reflect payment expectations within those categories.”
The ratings agencies have all but admitted, however, that by using the same labels for products carrying different levels of risk they may have left themselves open to the critique they now face. This is why they have proposed reforms such as explicit warnings and using different systems of rankings for different types of products.
By and large, Wall Street does not appear to have been fooled by the fact that CDOs and corporate bonds may have both been called AAA. The CDO market typically offered higher yields for triple A paper than the corporate debt market, implying that investors understood the risk profile was different. It wasn’t only the nature of the credit product that was heterogeneous. The pricing was as well.

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