Securitization rating performance and agency incentives Discussant Edward C.T. Lin National Taiwan University of Science and Technology NTU International Conference on Finance Taipei, Taiwan December 10-11, 2010

A brief summary There are three main findings for the study: Credit ratings do not fully reflect the systematic risk of the underlying asset portfolio securitizations. Credit ratings underestimate impairment risk during origination years and during years of high securitization volumes. Credit ratings are unable to predict impairment risk.

Some generation observations It is an interesting paper that looks into the usefulness of credit ratings for securitized products given the recent global financial crisis. While it is true that credit ratings may not provide timeliness information, the tone of the paper seems to put a large blame on its fail.

Some general observations The paper might serve readers well by providing some background of the securitization over the sample period leading to the global financial crisis.

Question on credit rating and impairment risk Based on the results in Table 6 and 7 , I thought credit ratings did a decent job in explaining impairment risk. They are robust under different models. They tend to overestimate impairment risk for asset portfolio category prior to GFC and underestimate during GFC. So, on average they are ok.

Question on origination years and impairment risk Table 8 shows that prior to GFC, original years correspond to lower impairment risk not captured by credit ratings. Does it imply that credit ratings overestimate impairment risk at those years? If no one can predict the timing and the severity of GFC, does it suggest that rating agencies are quite conservative in their ratings?

Question on fee revenue and impairment risk The authors suggest that impairment risk is underestimated at origination when fee revenue is high, implying that they may be agency incentive problems. However, can higher fees at origination simply reflect higher information asymmetry (risk for rating agencies) and higher information collection effort?

Other questions Is it realistic to expect ordinal ratings to fully reflect the systematic risk of the securitized products. They are large room for errors within each rating category given the complexity of the securitized products. Is it possible to separate impairments into principal impairments and interest impairments? Presumably the former incurs larger losses than the latter.