S&P signals retreat from model-based CDO ratings
Standard & Poor's has signalled a retreat from model-based ratings by proposing a new methodology for rating corporate CDOs
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This is clearly ridiculous "adjusting the inputs to yield the targetted outputs". Maybe S&P should take a different approach and instead of saying "We'll retrospectively adjust all models so that no "AAA" or "AA" deal ever defaults" they could say, "If you look at what probabilities we were rating to, a 7 year "AA" deal has about a 1% risk of default (or will default in 1 of 100 years). Since this is the now being tipped as the worst credit crisis / recession since the 1930's this is your 1 in 100 year event and you should expect your deals to blow up..............as we corrctly predicted they would"
Surely targeting the model outputs by tweaking the model inputs is what got us into this mess. Does no-one remember the AAA S&P rated tranches with a handful of percentage points of subordination referencing investment grade credits? Of course it doesn't matter how thin you would like the tranche... Why is it that no-one talks about ratings arbitrage any more?
They need to avoid rating AAA tail risk with Gaussian copulas but this is a muddled presentation of that principle
This makes a lot of sense - too bad its ten years too late!!
I am still waiting for "We apologize, we completely screwed up, we have no way properly evaluate these securities in any environment except for zero loss periods. Please ignore anything we say and we are giving back all of our fees to the investors." Ok, that is probably a little extreme, but given the witch hunts and blame games, this would be refreshing. Seriously, S&P the cat is out of the bag, horse left the barn, downgrading now based on a higher default/loss probability just makes you look more stupid....
Another laughable response from the rating agencies to the current market. I wonder how long it will take before they are also being asked by the regulators to give their bonuses back...
As long as investors can more easily understand this, S&P is doing great... This reads like the long-lost 13th chapter of Alice in Wonderland.
Yes! Of course, it's so much easier to explain the output if you've targeted that output first in order to adjust the inputs. This reminds me of the "judgment" issue in FAS 157 for Level 3 assets.
Does anyone else wonder about the statement, "adjust the inputs to yield the targeted outputs"?
This indicates more of a heuristic approach rather than a re-engineering of the fundamental model. One can almost always adjust a model’s inputs to return a desired output but what is that saying about the efficacy of the model in the first place? If stress testing a model produces unrealistic results, then the model itself is unrealistic or at best, can only be relied upon in periods of stable market conditions (when it doesn’t inform anyway).
CLOs
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- Napier Park refis top of structure of Regatta XV 3 days ago
Comment by: Anonymous. Posted 15 years ago [2009-03-24 13:19:24]