This is a great read…..”everything you wanted to now about why we got f$#%ed but were afraid to ask”.
How can this not be criminal?
Not only did the rating agencies fail to examine the accuracy of their own prior collateral ratings, but in many cases, they also used other agency’s ratings without checking for
accuracy. To correct for any shortcomings in the other agency’s rating methodology, they created the practice of “notching,” whereby they would simply decrease the rating of any
collateral security that they did not rate by one notch.22 In other words, if Moody’s rated a
CDO that was composed of collateral rated BB+ by Fitch only, Moody’s would instead use a rating of BB in their own CDO model because it was not their rating. They never went back and reanalyzed the other rating agency’s rating, conveniently assuming that decreasing it by a notch would compensate for any shortcomings in the initial risk analysis.
Read it for yourself…..
2009-CDOmeltdown