The Crux of the Matter: Ratings and Credit Risk Valuation at the heart of the Structured Finance Crisis

Michel Aglietta (), Ludovic Moreau () and Adrian Roche ()
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Michel Aglietta: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique
Ludovic Moreau: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique
Adrian Roche: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: The 2007/2008 global credit crisis was born out of opaque securitization transactions. Introducing structured products risk estimation techniques shows how the most basic investment analysis could not be done without detailed and updated knowledge on the assets of the pool. Access to such details was crucial for investors to perform an autonomous valuation, the lack of which led to a pervading acceptance of ratings at face value. The crisis brought numerous delusions to naïve users of these privately issued opinions. Coming back to the central role that investor played during the previous speculative episode and introducing a theoretical discussion on the dynamics of market finance, it is shown that trusting market discipline and due diligence was bound to end up being misguiding. Given that unprecedented rating volatility brought a share of the blame game to rating firms, strategies that would aim at securing an informed use of ratings are finally outlined.

Keywords: financial crisis; credit risk; rating agencies (search for similar items in EconPapers)
Date: 2009
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