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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

Which statement best describes how credit rating agencies' treatment of structured products contributed to the crisis?

Structured tranches carried the same letter grades as corporate bonds, yet their losses were highly sensitive to correlated, systematic housing risk. Investors who treated the ratings as equivalent underestimated how quickly highly rated tranches could suffer large losses.

  1. ARatings on structured tranches were based on the same default-probability metrics as corporate bonds, so investors overlooked their much higher correlation and systemic riskCorrect
  2. BAgencies refused to rate senior tranches, pushing investors toward unrated securities
  3. CAgencies rated only the equity tranches, which were sold to retail investors
  4. DAgencies assigned ratings based solely on the originator's capital ratio

Explanation

Structured tranches received the same letter ratings as corporate bonds, but their risk profile differed, with high sensitivity to systematic factors and correlation assumptions. Investors relying on ratings underestimated this. The other statements are factually incorrect.

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