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
Date Written: March 18, 2009
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: Suggested Citation