Although there is evidence that Moody’s and S&P remain relatively conservative when rating structured products, it is clear that even Moody’s has allowed its ratings scale for securitised products to become inflated. Bloomberg Markets reported in July that: “Corporate bonds rated Baa, the lowest Moody’s investment grade rating, had an average 2.2 per cent default rate over five-year periods from 1983 to 2005, according to Moody’s. From 1993 to 2005, CDOs with the same Baa grade suffered five-year default rates of 24 per cent, Moody’s found.” In other words, long before the current crisis, Moody’s was aware that its Baa CDO securities were 10 times as risky as its Baa corporate bonds.

© The Financial Times Limited 2007