Asset-Backed Securities Downgrades as Evidence of Skin in the Game prior to the Mortgage Crisis

37 Pages Posted: 23 Mar 2009 Last revised: 21 Jan 2020

See all articles by Eric James Higgins

Eric James Higgins

Kansas State University - College of Business Administration

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

Adi Mordel

Drexel University - Bennett S. LeBow College of Business

Date Written: March 18, 2009

Abstract

We investigate the effects of ABS downgrades on deal parents/sponsors prior to the mortgage crisis in order to establish whether securitization markets functioned in an incentive-compatible manner before the summer of 2007. We demonstrate that ABS downgrades are not typically caused by weak parents, even if ABS downgrades result in weak parents later on. The effect of ABS downgrades on parents is not only financial, but also arises from significant post- downgrade delays in ABS issuance that are not observed for parents of ABS deals that are not downgraded. The delays are demand- rather than supply-driven. Thus, prior to the crisis, parents had “skin in the game.” parent.

Keywords: Rating agencies, Asset-baked, Securitization, Market discipline

JEL Classification: G21, G24, G28

Suggested Citation

Higgins, Eric James and Mason, Joseph R. and Mordel, Adi, Asset-Backed Securities Downgrades as Evidence of Skin in the Game prior to the Mortgage Crisis (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1364725 or http://dx.doi.org/10.2139/ssrn.1364725

Eric James Higgins

Kansas State University - College of Business Administration ( email )

117 D Calvin Hall
Manhattan, KS 66506
United States
(785)-532-3936 (Phone)

Joseph R. Mason (Contact Author)

Louisiana State University - Ourso School of Business

2900 Business Education Complex
Baton Rouge, LA 70803
United States
202-683-8909 (Phone)

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

Adi Mordel

Drexel University - Bennett S. LeBow College of Business ( email )

215-622-8695 (Phone)

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