Working Paper: NBER ID: w15045
Authors: Efraim Benmelech; Jennifer Dlugosz
Abstract: Since June 2007, the creditworthiness of structured finance products has deteriorated rapidly. The number of downgrades in November 2007 alone exceeded 2,000 and many downgrades were severe, with 500 tranches downgraded more than 10 notches. Massive downgrades continued in 2008. More than 11,000 of the downgrades affected securities that were rated AAA. This paper studies the credit rating crisis of 2007-2008 and in particular describes the collapse of the credit ratings of ABS CDOs. Using data on ABS CDOs we provide suggestive evidence that ratings shopping may have played a role in the current crisis. We find that tranches rated solely by one agency, and by S&P in particular, were more likely to be downgraded by January 2008. Further, tranches rated solely by one agency are more likely to suffer more severe downgrades.
Keywords: No keywords provided
JEL Codes: E44; G01; G21; G24; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| number of rating agencies involved (G24) | likelihood of downgrades (G33) |
| tranches rated solely by one agency (G24) | likelihood of downgrades (G33) |
| tranches rated by only one agency (G24) | severity of downgrades (G33) |
| tranches rated by two or three agencies (G24) | severity of downgrades (G33) |