Is One Rating Enough?

Abstract

There are sound reasons why investors should require a second credit rating when screening CDO investments. A rating from one agency may reflect the likelihood that the issue will default while a rating from another may provide a measure of expected loss. It seems that most prudent investors would be interested in both risk measures, or perhaps even better, other measures of risk and reward that are easily incorporated into their risk monitoring systems. While it is often possible to “back out” these risk measures from two or more agency ratings, a better solution would be for each rating agency to publish a second rating (risk measure) to provide a more complete characterization of the risk of a given security.