Ralph F

Are The Ratings Agencies Really Taking a 'Tough Stance' on Subprime Mortgage Debt?

Bloomberg had v good coverage of this issue on 2007-05-31:



<blockquote class="quote"><b... Boom Masks Subprime Losses, Abetted by S&amp;P, Moody's, Fitch</b>

2007-05-31 00:08 (New York)
By Richard Tomlinson and David Evans

...The three leading rating companies, all based in New York, say that policing CDOs isn't their job. They just offer their educated opinions, says Noel Kirnon, senior managing director at Moody's.

... ``What we're saying is that many people have the tendency to rely on it, and we want to make sure that they don't,'' says Kirnon, whose firm commands 39 percent of the global credit rating market by revenue.

S&amp;P, which controls 40 percent, asks investors in its published CDO ratings not to base any investment decision on its analyses. Fitch, which has 16 percent of the worldwide credit rating field, says its analyses are just opinions and investors shouldn't rely on them.

The rating companies apply their usual disclaimer about the reliability of their analyses to CDOs. S&amp;P says in small print: ``Any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision.''...

...When it comes to CDOs, rating companies actually do much more than evaluate them and give them letter grades. The raters play an integral role in putting the CDOs together in the first place.

Banks and other financial firms typically create CDOs by wrapping together 100 or more bonds and other securities, including debt investments backed by home loans.

Credit rating companies help the financial firms divide the CDOs into sections known as tranches, each of which gets a separate grade, says Charles Calomiris, the Henry Kaufman professor of financial institutions at Columbia University in New York.

Credit raters participate in every level of packaging a CDO, says Calomiris, who has worked as a consultant for Bank of America Corp., Citigroup Inc., UBS AG and other major banks. The rating companies tell CDO assemblers how to squeeze the most profit out of the CDO by maximizing the size of the tranches with the highest ratings, he says.

...``It's important to understand that unlike in the corporate bond market, in the securitization market, the rating agencies run the show,'' he says. ``This is not a passive process of rating corporate debt. This is a financial engineering business.''

Credit raters consult with bankers in determining the makeup of a CDO, and banks make the final decisions, says Gloria Aviotti, Fitch's global head of structured finance...</blockqu...

The entire article is really worth reading:
www.bloomberg.com/apps...