An asset backed security (ABS) is made by bundling up loans or mortgages issued to many borrowers, separating them from the originating company and re-selling them to investors.
The credit quality of such securities is 'enhanced' using a variety of techniques so that they can usually earn a rating higher than the issuer.
Hidden Risks
But the IMF in its Global Financial Stability Report issued on Sept 24 says rating agencies have under-estimated the credit risks and such securities which tend to be illiquid also have significant unrecognized market risks when a holder tries to sell.
IMF said securities backed by sub-prime mortgages and collateralized debt obligations (CDO) backed by corporate debt securities had been downgraded two or three notches at a time by rating agencies.
Usually it was from BBB (in the investment grade