Comment by: Douglas Watson. Posted 14 years ago [2010-02-25 16:52:15]

Good point. The rating is simply an opinion of the likely outcome and the greater the potential volatility around that outcome the lower the rating should be. The problem here is even if there is a twin peak default pattern over the next year or so, the Aaa class is highly likely to be money good with a comfortable cushion.

Comment by: Anonymous. Posted 14 years ago [2010-02-25 04:31:29]

It's a hard choice as a 'prediction' is a best estimate of what is going to happen and a credit rating is a probability (usually a small one if it is a high rating) of something happening and so has more to do with the volatility around the prediction. Moody's position could be interpreted as we think the default rate is going to be 3.4% but we see a small possibility we could be way wrong

Comment by: Anonymous. Posted 14 years ago [2010-02-24 21:39:42]

Rating agencies always have a hard time maintaining consistency among different divisions. While the economists predict falling interest rates the CDO folks see the glass half empty.

Comment by: Douglas Watson. Posted 14 years ago [2010-02-24 15:46:44]

Well, if Moody's is right on default rates, their senior class ratings will often be wrong if they were downgraded from Aaa. More likely, Moody's is wrong on default rates. Note Merrill's (and others) "twin peak"/"maturiy wall" scenario for default rates, which would make Moody's junior class CLO ratings more accurate!