In Lecture 8 we discussed the role of credit rating inaccuracy in the 2008 financial crisis. Describe in detail: (1) why ratings for below-AAA subprime RMBS were so inaccurate (in the sense that actual default rates from 2008-2009 exceeded expected default rates for below-AAA securities), and (2) how the inaccuracy of ratings for below-AAA subprime RMBS generated high default rates for AAA-rated collateralized debt obligations (CDOs). You should include in your answer a brief description of what a CDO is. You may refer to the following graph: Impairment of 2005-2007 vintage mortgage-backed securities (MES) and CDOs as of year-end 2009 by initial rating. A security is impaired when it is downgraded to Cor Ca, or when it suffers a principal loss. IN BILLIONS OF DOLLARS $1,000 Not impeired Impaired A sa Aathry B Aaa Aathru B Alt-AMBS a g Authru B Subprime MBS CDOs SOURCE: Moody's Investors Service Special Comment Defit & Loss Rates of Structured Finse Securities 1993-2009 Moody's SFDRS In Lecture 8 we discussed the role of credit rating inaccuracy in the 2008 financial crisis. Describe in detail: (1) why ratings for below-AAA subprime RMBS were so inaccurate (in the sense that actual default rates from 2008-2009 exceeded expected default rates for below-AAA securities), and (2) how the inaccuracy of ratings for below-AAA subprime RMBS generated high default rates for AAA-rated collateralized debt obligations (CDOs). You should include in your answer a brief description of what a CDO is. You may refer to the following graph: Impairment of 2005-2007 vintage mortgage-backed securities (MES) and CDOs as of year-end 2009 by initial rating. A security is impaired when it is downgraded to Cor Ca, or when it suffers a principal loss. IN BILLIONS OF DOLLARS $1,000 Not impeired Impaired A sa Aathry B Aaa Aathru B Alt-AMBS a g Authru B Subprime MBS CDOs SOURCE: Moody's Investors Service Special Comment Defit & Loss Rates of Structured Finse Securities 1993-2009 Moody's SFDRS