More Excerpts from the Credit Rating Testimony

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.


  1. Rick_Pollack says:

    Given the pervasive amounts of low-level fraud in the loan origination process (like appraisals overstating the values of properties or falsified income statements) and the widespread use of automated underwriting systems, were the models used by analysts at S&P and other entities, were the models even accurate? Did analysts really understand what they were dealing with and properly factor in risk? Even Greenspan said he did not understand the “shady practices” in subprime lending…

    "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn't really get it until very late in 2005 and 2006."

    As an example, I noticed a class action suit was filed against Countrywide a few days ago by appraisers claiming they were pressured to overstate property values.