Type II ratings errors — where agencies prove too pessimistic in their assessment of bonds and securitisations — rarely generate much noise compared to their too-optimistic Type I cousins.
So here’s a chart you might have missed from Expect[ed] Loss:
It’s based on recently-released ‘ratings reversal’ data from Moody’s; bonds that have been downgraded and then get quickly (in the space of 12 months) upgraded. Collateralised Loan Obligations (CLOs) lead the pack with a reversal rate about five times that of other Collateralised Debt Obligations (CDOs).
The agency seems to now be rushing to make amends with tweaked CLO methodology.