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The Essentials of Risk Management, Second Edition, 2nd Edition by Robert Mark, Dan Galai, Michel Crouhy

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Appendix 12.1

WHY THE RATING OF CDOS BY RATING AGENCIES WAS MISLEADING1

Investors in complex credit products were particularly reliant on rating agencies because they often had little information at their disposal to assess the underlying credit quality of the assets held in their portfolios.

In particular, investors tended to assume that the ratings for structured products were stable: no one expected triple-A assets to be downgraded to junk status within a few weeks or even a few days.2 (However, the higher yields on these instruments, compared to the bonds of equivalently rated corporations, suggests that the market understood to some degree that the investments were not equivalent in terms of credit and/or liquidity risk.)

The sheer volume ...

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