Economics of Structured Finance

Journal of Economic Perspectives—Volume 23, Number 1—Winter 2009 —Pages 3–25
The Economics of Structured Finance
Joshua Coval, Jakub Jurek, and Erik Stafford
T he essence of structured finance activities is the pooling of economic

assets like loans, bonds, and mortgages, and the subsequent issuance of a
prioritized capital structure of claims, known as tranches, against these
collateral pools. As a result of the prioritization scheme used in structuring claims,
many of the manufactured tranches are far safer than the average asset in the
underlying pool. This ability of structured finance to repackage risks and to create
“safe” assets from otherwise risky collateral led to a dramatic expansion in the
issuance of structured securities, most of which were viewed by investors to be
virtually risk-free and certified as such by the rating agencies. At the core of the
recent financial market crisis has been the discovery that these securities are
actually far riskier than originally advertised.
We examine how the process of securitization allowed trillions of dollars of
risky assets to be transformed into securities that were widely considered to be safe,
and argue that two key features of the structured finance machinery fueled its
spectacular growth. First, we show that most securities could only have received
high credit ratings if the rating agencies were extraordinarily confident about their
ability to estimate the underlying securities’ default risks, and how likely defaults
were to be correlated. Using the prototypical structured finance security—the
collateralized debt obligation (CDO)—as an example, we illustrate that issuing a
capital structure amplifies errors in evaluating the risk of the underlying securities.
y Joshua Coval is Professor of Business Administration at Harvard Business School, Boston,

Massachusetts, and Jakub Jurek is Assistant Professor at Princeton University, Princeton, New
Jersey, and Erik Stafford is Associate Professor of Business Administration at Harvard
Business School, Boston, Massachusetts. Their e-mail addresses are 具[email protected]典,
具[email protected]典, and 具[email protected]典.
4 Journal of Economic Perspectives
In particular, we show how modest imprecision in the parameter estimates can lead
to variation in the default risk of the structured finance securities that is sufficient,
for example, to cause a security rated AAA to default with reasonable likelihood. A
second, equally neglected feature of the securitization process is that it substitutes
risks that are largely diversifiable for risks that are highly systematic. As a result,
securities produced by structured finance activities have far less chance of surviving
a severe economic downturn than traditional corporate securities of equal rating.
Moreover, because the default risk of senior tranches is concentrated in systemat-
ically adverse economic states, investors should demand far larger risk premia for
holding structured claims than for holding comparably rated corporate bonds. We
argue that both of these features of structured finance products—the extreme
fragility of their ratings to modest imprecision in evaluating underlying risks and
their exposure to systematic risks— go a long way in explaining the spectacular rise
and fall of structured finance.
For over a century, agencies such as Moody’s, Standard and Poor’s, and Fitch
have gathered and analyzed a wide range of financial, industry, and economic
information to arrive at independent assessments on the creditworthiness of vari-
ous entities, giving rise to the widely popular rating scales (AAA, AA, A, BBB, and
so on). Until recently, the agencies focused the majority of their business on
single-name corporate finance—that is, issues of creditworthiness of financial
instruments that can be clearly ascribed to a single company. In recent years, the
business model of credit rating agencies has expanded beyond their historical role
to include the nascent field of structured finance.
From its beginnings, the market for structured securities evolved as a “rated”
market, in which the risk of tranches was assessed by credit rating agencies. Issuers
of structured finance products were eager to have their new products rated on the
same scale as bonds so that investors subject to ratings-based constraints would be
able to purchase the securities. By having these new securities rated, the issuers
created an illusion of comparability with existing “single-name” securities. This
provided access to a large pool of potential buyers for what otherwise would have
been perceived as very complex derivative securities.
During the past decade, risks of all kinds have been repackaged to create vast
quantities of triple-A–rated securities with competitive yields. By mid-2007, there
were 37,000 structured finance issues in the U.S. alone with the top rating (Scholtes
and Beales, 2007). According to Fitch Ratings (2007), roughly 60 percent of all
global structured products were AAA-rated, in contrast to less than 1 percent of the
corporate issues. By offering AAA-ratings along with attractive yields during a
period of relatively low interest rates, these products were eagerly bought up by
investors around the world. In turn, structured finance activities grew to represent
a large fraction of Wall Street and rating agency revenues in a relatively short
period of time. By 2006, structured finance issuance led Wall Street to record
revenue and compensation levels. The same year, Moody’s Corporation reported
that 44 percent of its revenues came from rating structured finance products,
Joshua Coval, Jakub Jurek, and Erik Stafford 5
surpassing the 32 percent of revenues from their traditional business of rating

corporate bonds.
By 2008, everything had changed. Global issuance of collateralized debt obli-
gations slowed to a crawl. Wall Street banks were forced to incur massive write-
downs. Rating agency revenues from rating structured finance products disap-
peared virtually overnight and the stock prices of these companies fell by
50 percent, suggesting the market viewed the revenue declines as permanent. A
huge fraction of existing products saw their ratings downgraded, with the down-
grades being particularly widespread among what are called “asset-backed security”
collateralized debt obligations—which are comprised of pools of mortgage, credit
card, and auto loan securities. For example, 27 of the 30 tranches of asset-backed
collateralized debt obligations underwritten by Merrill Lynch in 2007 saw their
triple-A ratings downgraded to “junk” (Craig, Smith, and Ng, 2008). Overall, in
2007, Moody’s downgraded 31 percent of all tranches for asset-backed collateral-
ized debt obligations it had rated and 14 percent of those initially rated AAA (Bank
of International Settlements, 2008). By mid-2008, structured finance activity was
effectively shut down, and the president of Standard & Poor’s, Deven Sharma,
expected it to remain so for “years” (Financial Week, 2008).
This paper investigates the spectacular rise and fall of structured finance. We
begin by examining how the structured finance machinery works. We construct
some simple examples of collateralized debt obligations that show how pooling and
tranching a collection of assets permits credit enhancement of the senior claims.
We then explore the challenge faced by rating agencies, examining, in particular,
the parameter and modeling assumptions that are required to arrive at accurate
ratings of structured finance products. We then conclude with an assessment of
what went wrong and the relative importance of rating agency errors, investor
credulity, and perverse incentives and suspect behavior on the part of issuers, rating
agencies, and borrowers.
Manufacturing AAA-rated Securities
Manufacturing securities of a given credit rating requires tailoring the cash-

flow risk of these securities—as measured by the likelihood of default and the
magnitude of loss incurred in the event of a default—to satisfy the guidelines set
forth by the credit rating agencies. Structured finance allows originators to accom-
plish this goal by means of a two-step procedure involving pooling and tranching.
In the first step, a large collection of credit-sensitive assets is assembled in a
portfolio, which is typically referred to as a “special purpose vehicle.” The special
purpose vehicle is separate from the originator’s balance sheet to isolate the credit
risk of its liabilities—the tranches—from the balance sheet of the originator. If the
special purpose vehicle issued claims that were not prioritized and were simply
fractional claims to the payoff on the underlying portfolio, the structure would be
known as a pass-through securitization. At this stage, since the expected portfolio

loss is equal to the mean expected loss on the underlying securities, the portfolio’s
credit rating would be given by the average rating of the securities in the underlying
pool. The pass-through securitization claims would inherit this rating, thus achiev-
ing no credit enhancement.
By contrast, to manufacture a range of securities with different cash flow risks,
structured finance issues a capital structure of prioritized claims, known as tranches,
against the underlying collateral pool. The tranches are prioritized in how they
absorb losses from the underlying portfolio. For example, senior tranches only
absorb losses after the junior claims have been exhausted, which allows senior
tranches to obtain credit ratings in excess of the average rating on the average for
the collateral pool as a whole. The degree of protection offered by the junior
claims, or overcollateralization, plays a crucial role in determining the credit rating
for a more senior tranche, because it determines the largest portfolio loss that can
be sustained before the senior claim is impaired.
This process of pooling and tranching, common to all structured securities,
can be illustrated with a two-asset example. Consider two identical securities— call
them “bonds”— both of which have a probability of default pD, and pay $0 condi-
tional on default and $1 otherwise. Suppose we pool these securities in a portfolio,
such that the total notional value of the underlying fund is $2, and then issue two
tranches against this fund, each of which pay $1. A “junior” tranche can be written
such that it bears the first $1 of losses to the portfolio; thus, the junior tranche pays
$1 if both bonds avoid default and zero if either bond defaults. The second,
“senior” claim, which bears losses if the capital of the junior tranche is exhausted,
pays $1 if neither bond defaults or if only one out of two bonds defaults; it only
defaults if both bonds default. It should be intuitively clear that to compute the
expected cash flows (or default probabilities) for the tranches, we will need to know
the likelihood of observing both bonds defaulting simultaneously. In this example,
the default dependence structure can be succinctly described by means of a single
parameter— either the joint probability of default, or the default correlation.1
What makes this structure interesting is that if the defaults of the two bonds are
imperfectly correlated, the senior tranche will pay either $1 or $0 —just like the
individual bonds— except that it will be less likely to default than either of the
underlying bonds. For example, if the two bonds have a 10 percent default
probability and defaults are uncorrelated, the senior tranche will only have a
1 percent chance of default. This basic procedure allows highly risky securities to be
repackaged, with some of the resulting tranches sold to investors seeking only safe
investments. Obviously, junior tranches, being risky, will have low prices and high
1
If we assume that both securities are identical and denote the probability of observing both claims
default simultaneously by pDD, the default correlation parameter can be computed as (pDD ⫺ pD2)/
(pD*(1 ⫺ pD).
The Economics of Structured Finance 7
promised returns, while the senior tranches, being relatively safe, will have relatively
higher prices and lower promised returns.
A central insight of structured finance is that by using a larger number of
securities in the underlying pool, a progressively larger fraction of the issued
tranches can end up with higher credit ratings than the average rating of the
underlying pool of assets. For example, consider extending the two-bond example
by adding a third $1 bond, so that now three $1 claims can be issued against this
underlying capital structure. Now, the first tranche defaults if any of the three
bonds default, the second tranche defaults if two or more of the bonds default, and
the final, senior-most tranche only defaults when all three bonds default. If bonds
default 10 percent of the time and defaults are uncorrelated, the senior tranche will
now default only 0.1 percent of the time, the middle tranche defaults 2.8 percent
of the time, and the junior tranche defaults 27.1 percent of the time. Thus, by
including a third bond in the pool, two-thirds of the capital—as measured by the
tranche notional values— can be repackaged into claims that are less risky than the
underlying bonds.
Another way to increase the total notional value of highly-rated securities
produced is to reapply the securitization machinery to the junior tranches created
in the first round. For example, in the two-bond case in which defaults were
uncorrelated, the $1 junior tranche defaults with 19 percent probability. However,
if we combine this $1 junior tranche with an identical $1 junior tranche created
from another two-bond pool, we can again tranche the resulting $2 of capital into
two prioritized $1 claims. If there continues to be no correlation among underlying
assets, the resulting senior tranche from this second round of securitization—a
tranche that defaults if at least one bond defaults in each of the two underlying
pools— has a default probability of 3.6 percent, which is once again considerably
lower than that of the underlying bonds. The collateralized debt obligations
created from the tranches of other collateralized debt obligations are typically
called CDO-squared—that is, CDO2.
A key factor determining the ability to create tranches that are safer than the
underlying collateral is the extent to which defaults are correlated across the
underlying assets. The lower the default correlation, the more improbable it is that
all assets default simultaneously and therefore the safer the senior-most claim can
be made. Conversely, as bond defaults become more correlated, the senior-most
claims become less safe. Consider, for example, the two-bond case in which defaults
are perfectly correlated. Since now both bonds either survive or default simulta-
neously, the structure achieves no credit enhancement for the senior tranche.
Thus, in the two-bond example, while uncorrelated risks of default allow the senior
claim to have a 1 percent default probability, perfectly correlated risks of default
would mean that the senior claim inherits the risk of the underlying assets, at
10 percent. Finally, intermediate levels of correlation allow the structure to pro-
duce a senior claim with default risk between 1 and 10 percent.
The Challenge of Rating Structured Finance Assets
Credit ratings are designed to measure the ability of issuers or entities to meet
their future financial commitments, such as principal or interest payments.
Depending on the agency issuing the rating and the type of entity whose credit-
worthiness is being assessed, the rating is either based on the anticipated likelihood
of observing a default, or it is based on the expected economic loss—the product
of the likelihood of observing a default and the severity of the loss conditional on
default. As such, a credit rating can intuitively be thought of as a measure of a
security’s expected cash flow.2 In the context of corporate bonds, securities rated
BBB⫺ or higher have come to be known as investment grade and are thought to
represent low to moderate levels of default risk, while those rated BB⫹ and below
are referred to as speculative grade and are already in default or closer to it.
Table 1 reports Fitch’s estimates regarding the 10-year default probabilities of
corporate bonds with different ratings at issuance and gives their corresponding
annualized default rates. These estimates are derived from a study of historical data
and are used in Fitch’s model for rating collateralized debt obligations (Derivative
Fitch, 2006).3 It is noteworthy that within the investment grade range, there are ten
distinct rating categories (from AAA to BBB⫺) even though the annualized default
rate only varies between 0.02 and 0.75 percent. Given the narrow range of the
historical default rates, distinguishing between the ratings assigned to investment
grade securities requires a striking degree of precision in estimating a security’s
default likelihood. By contrast, the ten rating categories within the speculative
grade range (from BB⫹ to C) have default rates ranging from 1.07 to 29.96
percent.
In the single-name rating business, where the credit rating agencies had
developed their expertise, securities were assessed independently of each other,
allowing rating agencies to remain agnostic about the extent to which defaults
might be correlated. But to assign ratings to structured finance securities, the rating
agencies were forced to address the bigger challenge of characterizing the entire
joint distribution of payoffs for the underlying collateral pool. As the previous
section demonstrated, the riskiness of collateralized debt obligation tranches is
sensitive to the extent of commonality in default among the underlying assets, since
collateralized debt obligations rely on the power of diversification to achieve credit
enhancement.
The structure of collateralized debt obligations magnifies the effect of impre-
2
Credit rating agencies stress that their ratings are only designed to provide an ordinal ranking of
securities’ long-run (“through-the-cycle”) payoff prospects, whereas the expected cash flow interpreta-
tion takes a cardinal view of ratings.
3
A comprehensive description of Fitch’s rating model for collateralized debt obligations—the Default
VECTOR Model—including assumptions regarding default probabilities, recovery rates, and correla-
tions is available online. An Excel spreadsheet implementation of the model can be downloaded from
具http://www.fitchrating.com/jsp/corporate/ToolsAndModels.faces?context⫽2&detail⫽117典.
Table 1
Historical Default Experience of Bonds Rated by Fitch
Investment-grade Bonds
Rating at
issuance AAA AA⫹ AA AA⫺ A⫹ A A⫺ BBB⫹ BBB BBB⫺
10-year default
probability 0.19% 0.57% 0.89% 1.15% 1.65% 1.85% 2.44% 3.13% 3.74% 7.26%
Default rate
(annualized) 0.02% 0.06% 0.09% 0.12% 0.17% 0.19% 0.25% 0.32% 0.38% 0.75%
Speculative-grade Bonds
Rating at
issuance BB⫹ BB BB⫺ B⫹ B B⫺ CCC⫹ CCC CC C
10-year default
probability 10.18% 13.53% 18.46% 22.84% 27.67% 34.98% 43.36% 48.52% 77.00% 95.00%
Default rate
(annualized) 1.07% 1.45% 2.04% 2.59% 3.24% 4.30% 5.68% 6.64% 14.70% 29.96%
cise estimates of default likelihoods, amounts recovered in the event of default,

default correlation, as well as model errors due to the potential misspecification of
default dependencies (Tarashev and Zhu, 2007; Heitfield, 2008). These problems
are accentuated further through the sequential application of capital structures to
manufacture the collateralized debt obligation (CDO) tranches commonly known
as CDO2. With multiple rounds of structuring, even minute errors at the level of the
underlying securities that would be insufficient to alter the security’s rating can
dramatically alter the ratings of the structured finance securities.
To illustrate the sensitivity of the collateralized debt obligations and their
progeny, the CDO2, to errors in parameter estimates, we conduct a simulation
exercise. First, we simulate the payoffs to 40 collateralized debt obligation pools,
each comprised of 100 bonds with a five-year default probability of 5 percent and
a recovery rate of 50 percent of face value conditional on default.4 Using the
annualized default rates reported in Table 1 as a guide, each bond in our hypo-
thetical collateral pool would garner a just-below investment grade rating of BB⫹.
Finally, we fix the pairwise bond default correlation at 0.20 within each collateral
pool and assume the defaults of bonds belonging to different collateral pools are
uncorrelated. Our simulation methodology relies upon a simplified version of the
model that is the industry standard for characterizing portfolio losses.5
4
Recovery rates can vary by type of security, seniority, and the country of origin. Historical recovery rates
are between 40 and 50 percent for senior unsecured corporate bonds in the United States (Derivative
Fitch, 2006; Altman, 2006).
5
The common method for modeling the joint incidence of defaults is known as the copula method
(Schonbucher, 2003). This approach draws a set of N correlated random variables {Xi} from a pre-
Within each collateral pool, we construct a capital structure comprised of three

tranches prioritized in order of their seniority. The “junior tranche” is the first to
absorb losses from the underlying collateral pool and does so until the portfolio
loss exceeds 6 percent, at which point the junior tranche becomes worthless. The
“mezzanine tranche” begins to absorb losses once the portfolio loss exceeds 6 per-
cent and continues to do so until the portfolio loss reaches 12 percent. Finally, the
senior tranche absorbs portfolio losses in excess of 12 percent. We also construct a
CDO2—to be called “CDO2 [6 –12]”— by issuing a second capital structure of
claims against a pool that combines the mezzanine tranches from the 40 original
collateralized debt obligations.
While the parameter values used in our simulation do not map into any
particular market, they were chosen to mimic broadly the types of collateral and
securitizations commonly observed in structured finance markets.6 After simulating
the payoffs to the underlying collateral, our first step is to assign ratings to the
tranches. We do this by comparing the simulated likelihood of impairment to each
tranche’s capital with the five-year default probability based on the annualized
default rates reported in Table 1. Under our baseline parameters, the mezzanine
tranche of the original collateralized debt obligation garners the lowest investment
grade rating of BBB⫺, while the senior tranche—accounting for 88 percent of
capital structure—receives a AAA rating. The collateralized debt obligation made
up of mezzanine tranches, “CDO2 ([6, 12])” in the bottom panel of Table 2, has
mezzanine and senior tranches that are able to achieve a rating of AAA. Table 2
describes the default probabilities and expected payoffs (as a fraction of notional
value) for the simulated tranches of both the original collateralized debt obligation
and of the CDO2 constructed from the mezzanine tranches.
Of course, these estimates of risk depend crucially on whether default corre-
lations have been estimated correctly. Figure 1 explores the sensitivity of the
specified distribution and then assumes that a firm defaults if its variable, Xi ⫽ xi, is below the p-th
percentile of the corresponding marginal distribution, Fi(xi). Under this scheme, by construction, a firm
defaults p percent of the time and default dependence can be flexibly captured through the proposed
joint distribution for {Xi}. A popular choice for the joint distribution function is the multivariate
Gaussian (Vasicek, 2002), in which default correlation is simply controlled by the pairwise correlation of
(Xi , Xj). Popular off-the-shelf CDO rating toolkits offered by credit rating agencies, such as Fitch’s
Default VECTOR models, Moody’s CDOROM, and Standard and Poor’s CDO Evaluator, all employ
versions of this copula model.
6
For example, collateralized loan obligations tend to be issued in a three-tranche structure with
attachment points of 0 –5 percent, 5–15 percent, and 15–100 percent. Collateralized debt obligations
referencing a commonly used index of credit default swaps on corporate bonds have a more granular
capital structure with two types of junior claims (0 –3 percent and 3–7 percent), two types of mezzanine
claims (7–10 percent and 10 –15 percent), and two types of senior claims (15–30 percent and 30 –100
percent). Tranches that are based on an index of residential mortgage-backed securities have a similarly
granular structure with junior claims having attachment points of 0 –3 percent and 3–7 percent;
mezzanine claims, 7–12 percent and 12–20 percent; and senior claims, 20 –35 percent and 35–100
percent.
Table 2
Summary Statistics for CDO and CDO2 Tranches in our Simulation under
Baseline Parameters
Attachment points Default probability Expected payoff Rating
CDO
Junior 0%–6% 97.52% 0.59 NR
Mezzanine 6%–12% 2.07% ⬎ 0.99 BBB⫺
Senior 12%–100% ⬍ 0.00% ⬎ 0.99 AAA
CDO2 ([6, 12])
Junior 0%–6% 56.94% 0.93 C
Mezzanine 6%–12% ⬍ 0.00% ⬎ 0.99 AAA
Senior 12%–100% ⬍ 0.00% ⬎ 0.99 AAA
Note: While the parameter values used in our simulation do not map into any particular market, they
were chosen to mimic broadly the types of collateral and securitizations commonly observed in
structured finance markets.
original collateralized debt obligation and the CDO2 tranches to changes in default
correlation for bonds within each collateralized debt obligation. The correlation in
defaults for bonds belonging to different collateral pools remains fixed at zero. The
figure displays the expected payoff as a function of the default correlation, nor-
malized by the expected payoff under the baseline calibration. These values can be
thought of as illustrating the impact of either an error in the modeling assumptions
or an unexpected realization of the default experience on the value of a $1
investment in each tranche.
The top panel shows that the expected payoff of the underlying collateral pool
does not depend on the default correlation. As the default correlation increases
from its baseline value of 0.20, indicating default risk is less diversified than
expected, risk shifts from the junior claims to the senior claims. Consequently, the
expected payoff on the junior tranche rises relative to the baseline value, while the
expected payoff on the mezzanine tranche falls. The effect of changes in default
correlation on the mezzanine tranche of the collateralized debt obligation is
nonmonotonic. The expected payoff declines until the default correlation reaches
a value of 0.80, where the tranche has lost approximately 10 percent of its value
relative to the baseline calibration, and then rises as defaults become perfectly
correlated and risk is shifted toward the senior tranche. In the limit of perfect
default correlation, each tranche faces the same 5 percent chance of default
over five years as we assigned each of the individual securities in the underlying
portfolio.
The bottom panel of Figure 1 shows how shifts in the valuation of the
mezzanine tranche of the collateralized debt obligation are amplified by the
second-generation capital structure of the CDO2. For example, as the pairwise
default correlations within the underlying collateral pool of bonds increase from
Figure 1
Sensitivity of CDO and CDO2 to Changes in Default Correlation
A: CDO
Expected payoff (scaled by baseline payoff)
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Default correlation
Collateral Junior Mezzanine Senior
B: CDO2
1.2
1.0
0.8
0.6
0.4
0.2
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Default correlation
Note: Figure 1 explores the sensitivity of the original collateralized debt obligation and the CDO2
tranches to changes in default correlation for bonds within each collateralized debt obligation. The
correlation in defaults for bonds belonging to different collateral pools remains fixed at zero. The figure
displays the expected payoff as a function of the default correlation, normalized by the expected payoff
under the baseline calibration.
20 to 60 percent, the expected payoff on the mezzanine claim of the CDO2, which
is an investment grade security under the baseline parameters, drops by a stagger-
ing 25 percent.
In Figure 2, we examine the effect of errors in estimates of the probability of
default on the underlying securities on the expected tranche payoffs, while holding
default correlation fixed at the baseline value of 0.20. As the default probability
increases (declines) relative to the baseline estimate of 5 percent, the expected
payoff on the underlying collateral decreases (increases) monotonically, and this
effect is transferred to the tranches of the collateralized debt obligation. The
sensitivity of the tranches to errors in the estimate of default probability is deter-
mined by their seniority. For example, an increase in the default probability from
5 to 10 percent results in a 55 percent decline in the expected payoff for the junior
tranche, an 8 percent decline for the mezzanine tranche, and a 0.01 percent
decline for the senior tranche.
The bottom panel of Figure 2 again illustrates the theme that changing the
baseline parameters has a much starker effect on the CDO2 comprised of the
mezzanine tranches from the original collateralized debt obligations. In this case,
as default probabilities rise, the values of the junior and mezzanine tranches quickly
fall towards zero, and the value of the senior tranche falls substantially as well.
Table 3 provides a complementary illustration of how ratings are affected by
changes in the underlying assets’ default correlation and default probabilities.
Although the expected payoff of the senior tranche of the collateralized debt
obligation is relatively robust to changes in the model parameters, this is somewhat
deceiving. Due to the fine partitioning of investment grade ratings, even modest
changes in the model parameters can precipitate a meaningful rating downgrade
for the senior tranche. For example, the rating of the senior tranche for the
original collateralized debt obligation drops to A⫹ when the default probability
reaches 10 percent and reaches the investment grade boundary of BBB⫺ when the
default probability reaches 20 percent. Again, the CDO2 structure significantly
amplifies the variation in the expected payoffs. When the default probability is
increased to 10 percent, the mezzanine claim of the CDO2, which was initially rated
AAA, sees 50 percent of its expected payoff wiped out and its rating drop all the way
below the rating scale. Even a slight increase in the probability of default on the
underlying securities to 7.5 percent, which would only cause the underlying secu-
rities to be downgraded from BB⫹ to BB⫺, is sufficient to precipitate a downgrade
of the AAA-rated mezzanine CDO2 claim to BBB⫺. Given the plausible uncertainty
in estimates of the underlying model parameters, the “.SF” rating modifiers
recently proposed by regulators for structured finance instruments (U.S. Securities
and Exchange Commission, 2008; Securities Industry and Financial Markets Asso-
ciation, 2008), are perhaps best regarded as warning labels.
Finally, the simulation illustrates that with plausible magnitudes of over-
collateralization (the degree of protection offered by the junior claims—12
percent in our example), the expected payoff on a senior tranche of the original
Figure 2
Sensitivity of CDO and CDO2 to Changes in Default Probability
A: CDO
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Default probability
B: CDO2
1.2
1.0
0.8
0.6
0.4
0.2
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Default probability
Note: Figure 2 explores the sensitivity of the original collateralized debt obligation and the CDO2
tranches to changes in the default probability for bonds in each collateralized debt obligation. The
figure displays the expected payoff as a function of the default probability, normalized by the expected
payoff under the baseline calibration.
collateralized debt obligation is well protected from large changes in default

probabilities and correlations. While its rating might change, substantial im-
pairments to the value of such claims seem implausible, short of an economic
Table 3
Effect of Changes in Underlying Parameters on CDO and CDO2 Tranche
Ratings
Final rating
Initial rating Default correlation (␳) Default probability (pD)
(␳ ⫽ 20%, pD ⫽ 5%) 40% 60% 80% 7.50% 10% 12.50%
CDO
Junior NR D C CC NR NR NR
Mezzanine BBB⫺ BB⫺ B⫹ B⫹ B⫹ CCC CC
Senior AAA A⫹ BBB⫺ BB AAA A⫹ BBB⫺
CDO2 ([6, 12])
Junior C D NR NR NR NR NR
Mezzanine AAA B⫹ C CC BBB⫺ NR NR
Senior AAA AAA AAA AA⫹ AAA AAA B⫺
catastrophe. On the other hand, all tranches of the second generation securi-
tization, the CDO2, are highly sensitive to changes in the baseline parameters.
Even slight changes in default probabilities and correlations can have a sub-
stantial impact on the expected payoffs and ratings of the CDO2 tranches,
including the most senior claims.
As we show in the next section, a large fraction of collateralized debt obliga-
tions issued over the course of the last decade had subprime residential mortgage-
backed securities as their underlying assets. Importantly, many of these residential
mortgage-backed securities are themselves tranches from an original securitization
of a large pool of mortgages, such that collateralized debt obligations of mortgage-
backed securities are effectively CDO2s. Moreover, since substantial lending to
subprime borrowers is a recent phenomenon, historical data on defaults and
delinquencies of this sector of the mortgage market is scarce. The possibility for
errors in the assessment of the default correlations, the default probabilities, and
the ensuing recovery rates for these securities was significant. Such errors, when
magnified by the process of re-securitization, help explain the devastating losses
some of these securities have experienced recently.
The Relation of Structured Finance to Subprime
To ensure a continuous supply of credit to home buyers, government-

sponsored agencies such as Fannie Mae, Freddie Mac, and Ginnie Mae were
chartered to purchase mortgages originated by local banks, provided they satisfy
certain size and credit quality requirements. Mortgages conforming to these re-
quirements are repackaged by these agencies into mortgage-backed securities, and
resold in capital markets with the implicit guarantee of the U.S. government. In
contrast, mortgages that do not conform to size restrictions or borrower credit
quality standards are not eligible for purchase by the government-sponsored en-
terprises and are either held by their issuers or sold directly in secondary markets.7
In recent years, issuance of so-called “non-conforming” mortgages has increased
significantly. For example, origination of subprime mortgages—mortgages given to
those below the credit standards for the government-sponsored enterprises— grew
from $96.8 billion in 1996 to approximately $600 billion in 2006, accounting for 22
percent of all mortgages issued that year (U.S. Securities and Exchange Commis-
sion, 2008). During the same period, the average credit quality of subprime
borrowers decreased along a number of measures, as evidenced by rising ratios of
mortgage values relative to house prices, an increased incidence of second lien
loans, and issuance of mortgages with low or no documentation (Ashcraft and
Schuermann, 2008). When house prices declined, the stage was set for a significant
increase in default rates as many of these borrowers found themselves holding
mortgages in excess of the market value of their homes.
Because subprime mortgages were ineligible for securitization by government-
sponsored agencies, they found their way into capital markets by way of “private-
label” mortgage-backed securities, originated by Wall Street banks among others
(Federal Deposit Insurance Corporation, 2006). These securities carried the dual
risk of high rates of default due to the low credit quality of the borrowers; and high
levels of default correlation as a result of pooling mortgages from similar geo-
graphic areas and vintages. In turn, many subprime mortgage-backed bonds were
themselves re-securitized into what are called collateralized mortgage obligations,
effectively creating a CDO2. According to Moody’s, the share of collateralized debt
obligations that had other “structured” assets as their collateral expanded from
2.6 percent in 1998 to 55 percent in 2006 as a fraction of the total notional value
of all securitizations. In 2006 alone, issuance of structured finance collateralized
debt obligations reached $350 billion in notional value (Hu, 2007).
As it turned out, all of the factors determining expected losses on tranches of
collateralized debt obligations backed by mortgage-backed securities had been
biased against the investor. First, the overlap in geographic locations and vintages
within mortgage pools raised the prospect of higher-than-expected default corre-
lations. Second, the probability of default and the expected recovery values have
both been worse than expected due to the deterioration in credit quality of
subprime borrowers and because of assets being sold off under financial pressure
in “fire sales,” further driving down the prices of related assets. Finally, the preva-
7
Jumbo mortgages have notional values exceeding the conventional loan limit, which was $417,000 for
a single-family home in 2008. Subprime borrowers are defined as those with a FICO credit score below
620, limited credit history, or some other form of credit impairment. Alt-A borrowers have credit scores
sufficient to qualify for a conforming mortgage, but do not have the necessary documentation to
substantiate that their assets and income can support the requested loan amount.
lence of CDO2 structures further magnified the deleterious effects of errors in

estimates of expected losses on the underlying mortgages for investors.
A succinct view of the severity of the deterioration in private-label residential
mortgage-backed securities is provided by the ABX.HE indices. These indices are
compiled by Markit in cooperation with major Wall Street banks and track the
performance of subprime residential mortgage-backed securities along various
points in the rating spectrum.8 For example, the ABX.HE.BBB 07-01 captures the
average value of 20 BBB-rated mortgage-backed securities obtained by pooling and
tranching subprime mortgages issued in the first half of 2007. Intuitively, each of
the underlying mortgage-backed securities can be thought as loosely corresponding
to a mezzanine tranche of a collateralized debt obligation in our simulation.
Although the ABX.HE.BBB 07-01 index traded as high as 98.35, by August 2008, it
had an average rating of CCC and a market price of roughly 5 cents on the dollar.
With such abysmal performance in the residential mortgage-backed market, collat-
eralized debt obligations backed by this type of structured collateral are virtually
guaranteed to fail. As illustrated by our simulation, a collateralized debt obligation
made up of investment grade mezzanine tranches—that is, a CDO2— can sustain
very large losses even with small changes in the realized default probabilities and
correlations.
The Pricing of Systematic Risk in Structured Products
When credit rating agencies started rating both structured finance and single-
name securities on the same scale, it may well have lured investors seeking safe
investments into the structured finance market, even though they did not fully
appreciate the nature of the underlying economic risks. In the logic of the capital
asset pricing model, securities that are correlated with the market as a whole should
offer higher expected returns to investors, and hence have higher yields, than
securities with the same expected payoffs (or credit ratings) whose fortunes are less
correlated with the market as a whole. However, credit ratings, by design, only
provide an assessment of the risks of the security’s expected payoff, with no
information regarding whether the security is particularly likely to default at the
same time that there is a large decline in the stock market or that the economy is
in a recession.
Because credit ratings only reflect expected payoffs, securities with a given
credit rating can, in theory, command a wide range of yield spreads—that is, yield
in excess of the yield on a U.S. Treasury security of the same duration— depending
on their exposure to systematic risks. For example, consider a security whose
default likelihood is constant and independent of the economic state, such that its
8
Additional information on the Markit ABX indices, including pricing, can be found at 具http://
www.markit.com/information/products/category/indices/abx.html典.
payoff is unrelated to whether the economy is in a recession or boom, whether

interest rates are rising or falling, or the behavior of any other set of economic
indicators. An example of this type of a security is a traditional catastrophe bond.
Catastrophe bonds are typically issued by insurers and deliver their promised payoff
unless there is a natural disaster, such as a hurricane or earthquake, in which case
the bond defaults. Under the working assumption that a single natural disaster
cannot have a material impact on the world economy, a traditional catastrophe
bond will earn a yield spread consistent with compensation for expected losses.
Investors are willing to pay a relatively high price for catastrophe bonds because
their risks are uncorrelated with other economic indicators and therefore can be
eliminated through diversification.
At the other end of the range, the maximum yield spread for a security of a
given rating is attained by a security whose defaults are confined to the worst
possible economic states. If we assume that the stock market provides an ordering
of economic states—that is, if the Standard and Poor’s 500 index is at 800, the
economy is in worse condition than if that same index is at 900 —then the security
with maximal exposure to systematic risk is a digital call option on the stock market.
A digital call option pays $1 if the market is above a pre-determined level (called a
“strike price”) at maturity and $0 otherwise. Because this security “defaults” and
fails to pay only when the market is below the strike price, it represents the security
with the greatest possible exposure to systematic risk. By selecting the appropriate
strike price, the probability that the call fails to make its promised payment can be
tuned to match any desired credit rating. However, because a digital call option
concentrates default in the worst economic states, investors will insist on receiving
a high return as compensation for bearing the systematic risk and require the
option to deliver the largest yield spread of all securities with that credit rating.
The process of pooling and tranching effectively creates securities whose
payoff profiles resemble those of a digital call option on the market index. Intu-
itively, pooling allows for broad diversification of idiosyncratic default risks, such
that—in the limit of a large diversified underlying portfolio—losses are driven
entirely by the systematic risk exposure. As a result, tranches written against highly
diversified collateral pools have payoffs essentially identical to a derivative security
written against a broad economic index.
In effect, structured finance has enabled investors to write insurance against
large declines in the aggregate economy. Investors in senior tranches of collater-
alized debt obligations bear enormous systematic risk, as they are increasingly likely
to experience significant losses as the overall economy or market goes down. Such
a risk profile should be expected to earn a higher rate of return than those available
from single-name bonds, whose defaults are affected by firm-specific bad luck. If
investors in senior claims of collateralized debt obligations do not fully appreciate
the nature of the insurance they are writing, they are likely to be earning a yield that
appears attractive relative to that of securities with similar credit ratings (that is,
securities with a similar likelihood of default), but well below the return they could
have earned from simply writing such insurance directly—say, by making the
appropriate investment in options on the broader stock market index. In Coval,
Jurek, and Stafford (forthcoming), we provide evidence for this conjecture, show-
ing that senior tranches in collateralized debt obligations do not offer their
investors nearly large enough of a yield spread to compensate them for the actual
systematic risks that they bear.
The fact that corporate bonds and structured finance securities carry risks that
can, both in principle and in fact, be so different from a pricing standpoint casts
significant doubt on whether corporate bonds and structured finance securities can
really be considered comparable, regardless of what the credit rating agencies may
choose to do.
The Rise and Fall of the Structured Finance Market
The dramatic rise and fall of structured finance products has been remarkable.
In under a decade, issuance of these products within the U.S. economy grew more
than ten-fold. In the first three quarters of 2005, $25–$40 billion of structured
finance products were issued in each quarter, according to data from the Securities
Industry and Financial Markets Association. In the last quarter of 2006 and the first
two quarters of 2007, issuance of structured finance products peaked at about $100
billion in each quarter. But by the first two quarters of 2008, these quantities had
dropped to less than $5 billion per quarter.
It is easy to see how the events of 2007 and 2008 compelled investors to reassess
the risks they were bearing in structured products. Less obvious is how structured
finance achieved such amazing growth in such a short period of time. Why were
investors eager to purchase structured products and issuers eager to supply them?
As we have argued, the key to understanding the market’s dramatic rise and fall is
to recognize the tendency of pooling and tranching to amplify mistakes in the
assessment of underlying asset default risks and correlations as well as their ability
to concentrate systematic risks in the most senior tranches.
The rapid growth of the market for structured products coincided with fairly
strong economic growth and few defaults, which gave market participants little
reason to question the robustness of these products. In fact, all parties believed they
were getting a good deal. Many of the structured finance securities with AAA-
ratings offered yields that were attractive relative to other, rating-matched alterna-
tives, such as corporate bonds. The “rated” nature of these securities, along with
their yield advantage, engendered significant interest from investors. However,
these seemingly attractive yields were in fact too low given the true underlying risks.
First, the securities’ credit ratings provided a downward-biased view of their actual
default risks, since they were based on the credit rating agencies’ naı̈ve extrapola-
tion of the favorable economic conditions. Second, the yields failed to account for
the extreme exposure of structured products to declines in aggregate economic
conditions (in other words, systematic risk). The spuriously low yields on senior
claims, in turn, allowed the holders of remaining claims to be overcompensated,
incentivizing market participants to hold the “toxic” junior tranches. As a result of
this mispricing, demand for structured claims of all seniorities grew explosively.
The banks were eager to play along, collecting handsome fees for origination and
structuring. Ultimately, the growing demand for the underlying collateral assets
lead to an unprecedented reduction in the borrowing costs for homeowners and
corporations alike, fueling the real estate bubble that is now unwinding.
It seems that few investors were worried that the underlying assets were
overvalued, and those who were had incentives to disregard this possibility. This
changed rapidly when subprime mortgage defaults started increasing. As we dem-
onstrated earlier, errors in default probabilities adversely affect all of the tranches,
with the junior tranches taking the first losses. Moreover, the CDO2 structure,
which was especially common in this market, magnifies these errors, such that even
their senior-most tranches can be significantly impaired.
It is tempting to lay the bulk of the blame for the rise and fall of structured
finance on the credit rating agencies, since it was the agencies that evaluated and
deemed assets created by collateralized debt obligations as “safe.” There is certainly
evidence that the rating agencies made some significant mistakes. For example, in
May 2008, Moody’s acknowledged that it had inadvertently given AAA-ratings to
billions of dollars of structured finance products due to a bug in one of its ratings
models (Jones, Tett, and Davies, 2008). In March 2007, First Pacific Advisors
discovered that Fitch used a model that assumed constantly appreciating home
prices, ignoring the possibility that they could fall. Robert Rodriguez (2007), the
chief executive officer of First Pacific Advisors, describes the discovery:
We were on the March 22 call with Fitch regarding the sub-prime securitiza-
tion market’s difficulties. In their talk, they were highly confident regarding
their models and their ratings. My associate asked several questions. “What are
the key drivers of your rating model?” They responded, FICO scores and
home price appreciation (HPA) of low single digit (LSD) or mid single digit
(MSD), as HPA has been for the past 50 years. My associate then asked, “What
if HPA was flat for an extended period of time?” They responded that their
model would start to break down. He then asked, “What if HPA were to
decline 1% to 2% for an extended period of time?” They responded that their
models would break down completely. He then asked, “With 2% depreciation,
how far up the rating’s scale would it harm?” They responded that it might go
as high as the AA or AAA tranches.
It certainly appears that rating agencies did not fully appreciate the fragility of
their estimates nor the possible effects of modest errors in assumptions about
default correlations and probabilities in their credit ratings. But this lack of
understanding was apparently shared by the regulators who tied bank capital
requirements to ratings, as well as by the investors who outsourced their due

diligence to rating agencies without sufficient consideration of whether credit
ratings meant the same thing for structured finance as they had for single-name
securities. In particular, none of the key parties seemed to recognize that small
errors in rating individual securities, errors that would have no material effect in
the single-name market, are significantly magnified in the tranches of a collateral-
ized debt obligation structure, and can be further magnified when CDO2 are
created from the original collateralized debt obligations, as was common in the
mortgage-backed securitizations.
There is also some evidence that perverse incentives induced questionable
behavior on the part of market participants. One concern is over the possibility of
conflicts of interest that may arise because the issuer, rather than the investor, pays
for the rating. Mason and Rosner (2007) argue that the process and complexity of
creating structured finance products requires rating agencies essentially to
“become part of the underwriting team” rather than act as agents for outside
investors. On the other side, the Committee on the Global Financial System from
the Bank of International Settlements (2005, p. 26) investigated this concern and
concluded that it was no more severe for structured finance products than for
single-name credit products, arguing that reputation was a strong force against bad
behavior in both markets: “In fact, there appear to be no fundamental differences
in the rating processes for structured finance products and traditional bonds. The
potential conflicts of interest arising in structured finance are thus unlikely to be
materially different from those in the traditional segments of the agencies’ busi-
ness.” Looking at the Bank of International Settlements (2005) report several years
later, it offers an example of how a variety of important market participants viewed
structured finance products and traditional bonds to be highly similar. It also
articulates a widely-held view that market forces would solve potential problems.
This confusion over the nature of structured products combined with a belief and
reliance on market efficiency proved a potent combination.
The U.S. Securities and Exchange Commission (2008) recently summarized its
findings from an investigation of several credit rating agencies. It found much that
could be improved in the rating process and that analysts and managers generally
understood how their actions affected profits and could be in conflict with the goal
of accurate credit risk assessment (p. 12):
For example, in one exchange of internal communications between two

analysts at one rating agency, the analysts were concerned about whether they
should be rating a particular deal. One analyst expressed concern that her
firm’s model did not capture “half” of the deal’s risk and that “it could be
structured by cows and we would rate it” (Email no. 1: Analytical Staff to
Analytical Staff, Apr. 5, 2007, 1:13 PM).
In another email, an analytical manager in the same rating agency’s CDO

group wrote to a senior analytical manager that the rating agencies continue
to create an “even bigger monster—the CDO market. Let’s hope we are all
wealthy and retired by the time this house of cards falters. ;o)” (Email no. 2:
Analytical Manager to Senior Analytical Manager, Dec. 15, 2006, 8:31 PM).
The investment banks played a dual role of investors and dealers in the
structured finance market. The business offered enormous short-run payoffs, which
seemed too compelling to ignore even if value-destroying in the long-run. The
banks were generally eager to keep the structured finance business going even as
underwriting standards fell. The combination of low capital requirements imposed
on AAA-rated assets and a commonly held perception that they were “safe,” allowed
banks to hold on to any senior tranches that were not sold to investors. But when
the structured finance market collapsed in late 2007, the investment banks found
themselves holding hundreds of billions of dollars of low-quality asset pools, many
of which consisted of leveraged buy-out loans, subprime mortgages, and bonds
from collateralized debt obligations in process—that is, where the tranches had not
yet been sold to other investors.9
There is some evidence that Wall Street executives realized it would end one
day, but in the meantime, they had little incentive to move to the sidelines. In July
2007, the then-CEO of Citigroup, Chuck Prince, acknowledged that the cheap
credit-fueled buy-out boom would eventually end, but that in the meantime, his
firm would continue to participate in structured finance activities (as reported in
Nakamoto and Wighton, 2007): “When the music stops, in terms of liquidity, things
will get complicated. As long as the music is playing, you’ve got to get up and dance.
We’re still dancing.”
Finally, the minimum capital requirements for banks set forth in Basel I and II
may have played an important role in the evolution of the structured finance
market. Under these guidelines, banks holding AAA-rated securities were required
to hold only half as much capital as was required to support other investment-grade
securities. As a result of this built-in demand by banks for AAA-rated securities, a
small yield advantage in AAA-rated structured finance securities may have led to a
large increase in the demanded quantity. As discussed in the previous section, the
structured finance machinery enabled the creation of AAA-rated securities that had
a yield advantage over single-name AAA-rated securities, but only by filling these
securities with systematic risks or by rating them incorrectly.
9
For a detailed study of the market for collateralized loan obligations, see Benmelech and Dlugosz
(2008).
Implications and Conclusions
During the credit crunch from late 2007 and into 2008, the buyers of highly
rated structured finance products largely stopped buying. The initial cause for
this change was that subprime-related securities were experiencing large losses,
which created concerns about structured finance products more generally.
Some practitioners believe that the credit crunch of 2007 and 2008 will work
itself out, as such episodes tend to do, and the market for structured credit will
return as before. We hold the more skeptical view that the market for structured
credit appears to have serious structural problems that may be difficult to
overcome.
As we have explained, these claims are highly sensitive to the assumptions
of 1) default probability and recovery value, 2) correlation of defaults, and
3) the relation between payoffs and the economic states that investors care about
most. Beginning in late 2007 and continuing well into 2008, it became increasingly
clear to investors in highly-rated structured products that each of these three key
assumptions were systematically biased against them. These investors are now
reluctant to invest in securities that they do not fully understand.
The ability to create large quantities of AAA-rated securities from a given
pool of underlying assets is likely to be forever diminished, as the rating process
evolves to better account for parameter and model uncertainty. The key is
recognizing that small errors that would not be costly in the single-name
market, are significantly magnified by the collateralized debt obligation struc-
ture, and can be further magnified when collateralized debt obligations are
created from the tranches of other collateralized debt obligations, as was
common in mortgage-backed securitizations. The good news is that this mistake
can be fixed. For example, a Bayesian approach that explicitly acknowledges
that parameters are uncertain would go a long way towards solving this problem.
Of course, adopting a Bayesian perspective on parameter uncertainty will
necessarily mean far less AAA-rated securities can be issued and therefore fewer
opportunities to offer investors attractive yields.
Additionally, investors need to recognize the fundamental difference be-
tween single-name and structured securities when it comes to exposure to
systematic risk. Unlike traditional corporate bonds, whose fortunes are primar-
ily driven by firm-specific considerations, the performance of securities created
by tranching large asset pools is strongly affected by the performance of the
economy as a whole. In particular, senior structured finance claims have the
features of economic catastrophe bonds, in that they are designed to default
only in the event of extreme economic duress. Because credit ratings are silent
regarding the state of the world in which default is likely to happen, they do not
capture this exposure to systematic risks. The lack of consideration for these
types of exposures reduces the usefulness of ratings, no matter how precise they
are made to be.
y We thank Eli Cohen, Lauren Cohen, Robin Greenwood, Jim Hines, Chris Malloy, Eric Del
Monaco, André Perold, Hyun Shin, Andrei Shleifer, Jeremy Stein, and Timothy Taylor for
helpful comments and discussions.
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Economics of Structured Finance

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Economics of Structured Finance

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Journal of Economic Perspectives—Volume 23, Number 1—Winter 2009 —Pages 3–25

The Economics of Structured Finance

Joshua Coval, Jakub Jurek, and Erik Stafford

T he essence of structured finance activities is the pooling of economic

y Joshua Coval is Professor of Business Administration at Harvard Business School, Boston,

surpassing the 32 percent of revenues from their traditional business of rating

Manufacturing AAA-rated Securities

Manufacturing securities of a given credit rating requires tailoring the cash-

known as a pass-through securitization. At this stage, since the expected portfolio

The Challenge of Rating Structured Finance Assets

cise estimates of default likelihoods, amounts recovered in the event of default,

Within each collateral pool, we construct a capital structure comprised of three

Attachment points Default probability Expected payoff Rating

Collateral Junior Mezzanine Senior

Collateral Junior Mezzanine Senior

Collateral Junior Mezzanine Senior

Collateral Junior Mezzanine Senior

collateralized debt obligation is well protected from large changes in default

Initial rating Default correlation (␳) Default probability (pD)

(␳ ⫽ 20%, pD ⫽ 5%) 40% 60% 80% 7.50% 10% 12.50%

The Relation of Structured Finance to Subprime

To ensure a continuous supply of credit to home buyers, government-

lence of CDO2 structures further magnified the deleterious effects of errors in

The Pricing of Systematic Risk in Structured Products

payoff is unrelated to whether the economy is in a recession or boom, whether

The Rise and Fall of the Structured Finance Market

requirements to ratings, as well as by the investors who outsourced their due

For example, in one exchange of internal communications between two

In another email, an analytical manager in the same rating agency’s CDO

Implications and Conclusions

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