Rating the products
Rating agencies play a crucial role in appraising investors of the risk inherent in a CDO, so their assessment criteria and methodologies are of prime importance. Just how scientific an approach do the agencies take when deciding on a rating?
All rating agencies use three main criteria, or inputs, as the basis of the models they use to rate CDOs. The first and most basic of these are the credit ratings of the assets or reference entities within the CDO, which themselves will generally be rated by one or more of the main agencies. "Since underlying assets in a CDO are typically rated by Fitch, this rating will be the primary reference for portfolio analysis," explains a Fitch report published in August 2003. "However, if no Fitch
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