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This is one reason there was so much bad sub prime lending. The sup prime debt was sold on to another party, who then packaged the debt in with supposedly better quality debt at which point it was given a rating by a independent rating agency. It is turned into a financial instrument/derivative called a Collateralized Debt Obligations or CDO that can be traded by financial markets.


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Not quite. CDOs are over collateralized and thus it's not taking lower quality debt and making it higher quality debt. Anyway the WSJ had an article the other day about the rating agencys and the bonds they've downgraded as well as put on a ratings alert. There were no AAA or AA bonds that were downgraded or put on watch for a possible downgrade. Only a few A rated bonds were. Perhaps the CDOs from sub prime lending weren't over collateralized enough who knows. But yes many of the lower grade bonds have been downgraded as well as being put on watch for a downgrade. CDOs themselves aren't inherently bad (I'm fine with them and they do provide liquidity for loans) but the rating of the bonds may not be what they should be. I will point out that this happens to corporate bonds alot as well i.e. corporate bonds get downgraded and usually it's the lower quality bonds that get the most downgrades as would be expected. One more thing, the amount of money in sub prime mortgage lending in the US is a gnat on the wall compared to the totality of money that is lent for mortgages.