> The only reason anyone ever bought a CDO is because
> they believed it would pay off. A triple-A rating won't help
> you if the security ends up defaulting anyway. And they
> all understood that CDOs would not pay off if national
> house prices fell. They bought the CDOs because - just
> like everyone else - they believed house prices wouldn't
Not sure about this, but I believe I've heard (or read somewhere) that large institutional investors (to pacify their shareholders, e.g. unions, etc., who may not be very actively monitoring the portfolios) have rules in their trust agreements that rely on these ratings so that, when these ratings are adjusted, they may trigger the automatic rebalancing of a number of portfolios. Since these funds are large, these changes can make a big splash. Is this a urban myth?