Did Subjectivity Play a Role in CDO Credit Ratings?
John M. Griffin
University of Texas at Austin - Department of Finance
Dragon Yongjun Tang
The University of Hong Kong - School of Economics and Finance
July 27, 2011
Journal of Finance, Forthcoming
AFA 2010 Atlanta Meetings Paper
CELS 2009 4th Annual Conference on Empirical Legal Studies Paper
McCombs Research Paper Series No. FIN-04-10
Analyzing 916 CDOs, we find that a top credit rating agency frequently made positive adjustments beyond its main model that amounted to 12.1% larger AAA tranche sizes. These adjustments are difficult to explain by likely determinants, but exhibit a clear pattern: CDOs with smaller model-implied AAA sizes receive larger adjustments. CDOs with larger adjustments experience more severe subsequent downgrading. Additionally, prior to April 2007, 91.2% of AAA rated CDOs only comply with the credit rating agency’s own AA default rate standard. Accounting for adjustments and the criterion deviation indicates that AAA tranches were on average structured to BBB support levels.
Number of Pages in PDF File: 54
Keywords: CDO, Credit Rating
Date posted: March 22, 2009 ; Last revised: February 23, 2012