Misfortune's Formula: Structured Credit Ratings
Commentary: LIPPER HedgeWorld - Wednesday, September 19, 2007
By Janet Tavakoli, Tavakoli Structured Finance

The rating agencies, the Nationally Recognized Statistical Rating Organizations (NRSROs), protest they are misunderstood rather than miscalculating when it comes to rating structured products. They would like to claim that the market misapplies ratings by expecting ratings to indicate market price and liquidity, but the former are merely symptoms of the real problem. When it comes to structured products—in particular those involving asset-backed securitizations and collateralized debt obligations (CDOs)—the rating agencies failed to apply the most basic of statistical principals: One must take reasonable steps to understand the character of the risk one is modeling.
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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business, and she has authored a pair of books on the credit markets: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 2nd edition, 2001) and Collateralized Debt Obligations & Structured Finance (John Wiley & Sons, 2003).


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