Credit Crisis Fractures Trust in Rating Agencies

A new study from Greenwich Associates reveals that the liquidity crunch in global credit markets sparked by the collapse of the US sub-prime mortgage sector caused a nearly complete – if temporary – disruption in the trading and usage of many fixed income products. Despite the severity of the crisis to date, institutional investors fear that fallout will continue to spread. Greenwich Associates surveyed 251 institutional investors in North America, Europe and Asia about the extent and ramifications of the liquidity crisis that began in the US sub-prime sector this summer. The asset management firms, banks, hedge funds and other institutions participating in the study report that trading in various credit-related products and asset classes has broken down entirely at certain times since the outbreak of the crisis. In addition, a large majority of plan sponsors report that recent market developments have shaken their confidence in credit rating agencies. Among survey participants active in asset-backed securities (ABS) and collateralised debt obligations (CDOs), more than 80% say they have experienced difficulty in obtaining a price quote from their fixed-income dealers on these products since the outbreak of the market turmoil. Almost 80% of the collateralised loan obligation (CLO) users responding to the survey and nearly 70% of the leveraged loan investors say they have had trouble getting a dealer quote on the products, as did nearly 65% of survey participants active in mortgage-backed securities (MBS) and more than 60% of commercial mortgage-backed securities (CMBS) investors. More than three-quarters of the institutional investors responding believe that the liquidity crisis will continue to spread into products and markets beyond mortgages, collateralised debt obligations and other structured products. Additionally, more than 45% of study participants say they have deliberately changed their portfolio’s credit profile as a result of market conditions, including more than half the institutions with more than US$100bn in assets under management. The moves were almost universally in the same direction: away from risk in general and from mortgage and real estate exposure in particular, and into higher-rated instruments, especially shorter-duration government securities.


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