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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

Which of the following was a major criticism of credit rating agencies in relation to structured products before the 2007-2009 crisis?

Agencies were criticized because an AAA structured tranche was treated like an AAA corporate bond, though structured tranches were much more exposed to systematic risk and could be downgraded sharply together. The issuer-pays model added conflicts of interest.

  1. ARatings of structured tranches were treated as equivalent to ratings of corporate bonds even though structured products were far more sensitive to systematic riskCorrect
  2. BAgencies refused to rate any securitized product
  3. CAgencies rated only products that the issuer had not paid for
  4. DAgencies assigned lower ratings to senior tranches than to equity tranches

Explanation

Senior structured tranches carried AAA ratings like corporate bonds, but their losses were concentrated in systemic downturns, so ratings migrated sharply. The issuer-pays model also created conflicts of interest. The other options contradict actual practice.

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