Of Credit Agencies, Cows and Memos - Oh My!

Some quick excerpts from documents obtained by the House Oversight Committee and presented today:

In one document, an S&P employee in the structured finance division writes: “It could be structured by cows and we would rate it.” In another, an employee asserts: “Rating agencies continue to create [an] even bigger monster — the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.” {Emphasis added][See facsimile below]

And another:

In 2001, Mr. Raiter [of S&P] was asked to rate an early collateralized debt obligation called “Pinstripe.” He asked for the “collateral tapes” so he could assess the creditworthiness of the home loans backing the CDO. This is the response he got from Richard Gugliada, the managing director: "Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don’t have it and can’t provide it. Nevertheless we MUST produce a credit estimate. … It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so."

Mr. Raiter was stunned. He was being directed to rate Pinstripe without access to essential credit data. He e-mailed back: “This is the most amazing memo I have ever received in my business career.” [Emphasis added]

Much more here.

Another excerpt from the credit rating testimony today, this one from a former senior S&P official:

This inevitably begs the question: why didn’t management see the need to keep [its ratings] model current [with respect to CDOs/subprime/etc.]? The answer is complex. First and foremost, it was expensive to build or acquire the growing data bases, perform the necessary statistical analyses, complete the IT code modifications and implement and distribute new versions of the model - this process also required significant additions to staff. By 2001, the focus at S&P was profits for the parent company, McGraw-Hill- it was not on incurring additional expense. Second, there was an intense debate within the ratings groups as to whether we needed loan level data and related analyses. The Managing Director of the surveillance area for RMBS did not believe loan level data was necessary and that had the effect of quashing all requests for funds to build in-house data bases. A third reason given was that the RMBS group enjoyed the largest ratings market share among the three major rating agencies (often 92% or better), and improving the model would not add to S&P’s revenues.

In short, S&P didn't feel like it needed to adjust its credit models -- it was making too much money.

More here.

The actual soon-to-be-infamous "cows" IM exchange from credit rating agency S&P:

Comments

[BerkeleyBob:]

Amazing. I have had the belief the credit rating agencies abetted the fraudulent sale of CDO's, but I did not expect Congress to exercise any real investigatory zeal. Although Waxman is tenacious, I am not convinced there will be meaningful follow-through even if there is a change in the executive branch.

2008 Oct 23 02:05 PM