TAILIEUCHUNG - The Credit Rating Crisis∗Harvard University and NBER

While the magnitude of differences in credit scores was very substantial, the impact of credit scores on pricing and availability varies among companies and is not directly examined in this study. The impact of scores on premium levels will be directly addressed in studies expected to be completed by late 2004. Missouri statue prohibits sole reliance on credit scoring to determine whether to issue a policy. However, there are no limits on price increases that can be imposed due to credit scores, so. | The Credit Rating Crisis Efraim Benmelech Harvard University and NBER Jennifer Dlugosz Harvard University and HBS We thank Daron Acemuglo Adam Ashcraft George-Marios Angeletos Bengt Holmstrom David Laibson Chris Mayer Ken Rogoff Andrei Shleifer Jeremy Stein and Luigi Zingales for insightful discussions as well as seminar participants at Harvard University the 24th annual conference on Macroeconomics and the Minneapolis Federal Reserve Bank for useful comments. We also thank and Anna-Kathrine Barnett-Hart for help with the data. Shaunak Vankudre provided fantastic research assistance. All errors are our own. Corresponding author Efraim Benmelech Department of Economics Harvard University Littauer Center Cambridge MA 02138. E-mail effibenmelech@. The Credit Rating Crisis Abstract Since June 2007 the creditworthiness of structured finance products has deteriorated rapidly. The number of downgrades in November 2007 alone exceeded 2 000 and many downgrades were severe with 500 tranches downgraded more than 10 notches. Massive downgrades continued in 2008. More than 11 000 of the downgrades affected securities that were rated AAA. This paper studies the credit rating crisis of 2007-2008 and in particular describes the collapse of the credit ratings of ABS CDOs. Using data on ABS CDOs we provide suggestive evidence that ratings shopping may have played a role in the current crisis. We find that tranches rated solely by one agency and by S P in particular were more likely to be downgraded by January 2008. Further tranches rated solely by one agency are more likely to suffer more severe downgrades. Introduction By December 2008 structured finance securities accounted for over 11 trillion dollars worth of outstanding . bond market debt 35 .1 The lion s share of these securities was highly rated by rating agencies. More than half of the structured finance securities rated by Moody s carried a AAA rating - the highest possible credit rating. In 2007 and 2008 the

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