S. Hrg. 111–673 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF CREDIT RATING AGENCIES 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

VOLUME 3 OF 5 

APRIL 23, 2010 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 


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WALL STREET AND THE FINANCIAL CRISIS: THE ROLE OF CREDIT RATING AGENCIES 

VOLUME 3 OF 5 


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WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office,

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57–321 PDF 2010

S. Hrg. 111–673 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF CREDIT RATING AGENCIES 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

VOLUME 3 OF 5 

APRIL 23, 2010 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

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(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

ROLAND W. BURRIS, Illinois 

PAUL G. KIRK, JR., Massachusetts 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

LINDSEY GRAHAM, South Carolina 

ROBERT F. BENNETT, Utah 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PATRICIA R. HOGAN, Publications Clerk and GPO Detailee 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

PAUL G. KIRK, JR., Massachusetts 

TOM COBURN, Oklahoma 

SUSAN M. COLLINS, Maine 

JOHN MCCAIN, Arizona 

JOHN ENSIGN, Nevada 

ELISE J. BEAN, Staff Director and Chief Counsel 

DAVID H. KATZ, Counsel 

LAURA E. STUBER, Counsel 

CHRISTOPHER J. BARKLEY, Minority Staff Director 

ANTHONY G. COTTO, Counsel to the Minority 

MARY D. ROBERTSON, Chief Clerk 


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(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator Kaufman ............................................................................................. 8 

Prepared statements: 

Senator Levin .................................................................................................... 105 

Senator Coburn ................................................................................................. 112 

WITNESSES 

FRIDAY, APRIL 23, 2010 

Frank L. Raiter, Former Managing Director, Residential Mortgage Rating 

Group, Standard & Poor’s ................................................................................... 10 

Richard Michalek, Former Vice President and Senior Credit Officer, Structured Derivative Products Group, Moody’s Investors Services ........................ 12 

Eric Kolchinsky, Former Team Managing Director, Structured Derivative 

Products Group, Moody’s Investors Service ....................................................... 14 

Arturo Cifuentes, Ph.D., Former Moody’s Senior Vice President, Current Director, Finance Center, University of Chile, Santiago, Chile ........................... 16 

Susan Barnes, Current Managing Director, Mortgage-Backed Securities, 

Former North American Practice Leader, Residential Mortgage-Backed Securities, Standard & Poor’s ................................................................................. 45 

Yuri Yoshizawa, Group Managing Director, Structured Finance, Moody’s Investors Service ...................................................................................................... 47 

Peter D’Erchia, Current Managing Director, U.S. Public Finance, Former 

Global Practice Leader, Surveillance, Standard & Poor’s ................................ 48 

Raymond W. McDaniel, Jr., Chairman and Chief Executive Officer, Moody’s 

Corporation ........................................................................................................... 76 

Kathleen A. Corbet, Former President (2004–2007), Standard & Poor’s ............ 78 

ALPHABETICAL LIST OF WITNESSES

Barnes, Susan: 

Testimony .......................................................................................................... 45 

Prepared statement .......................................................................................... 155 

Cifuentes, Arturo, Ph.D.: 

Testimony .......................................................................................................... 16 

Prepared statement with attachments ........................................................... 144 

Corbet, Kathleen A.: 

Testimony .......................................................................................................... 78 

Prepared statement .......................................................................................... 210 

D’Erchia, Peter: 

Testimony .......................................................................................................... 48 

Prepared statement .......................................................................................... 173 

Kolchinsky, Eric: 

Testimony .......................................................................................................... 14 

Prepared statement .......................................................................................... 140 

McDaniel, Raymond W., Jr.: 

Testimony .......................................................................................................... 76 

Joint prepared statement with Yuri Yoshizawa ............................................ 186 

Michalek, Richard: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 119 

Raiter, Frank L.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 114 

Yoshizawa, Yuri: 

Testimony .......................................................................................................... 47 

Joint prepared statement with Raymond McDaniel ...................................... 186 


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EXHIBIT LIST 

1.a. Memorandum from Permanent Subcommittee on Investigations Chairman Carl Levin and Ranking Minority Member Tom Coburn to the 

Members of the Subcommittee ..................................................................... 220 

b. Excerpts from Documents Related to Credit Rating Agencies: Competitive Pressures Affecting Ratings, chart prepared by the Permanent Subcommittee on Investigations ......................................................................... 231 

c. Excerpts from Documents Related to Credit Rating Agencies: Ratings 

Methodology, chart prepared by the Permanent Subcommittee on Investigations .......................................................................................................... 234 

d. Excerpts from Documents Related to Credit Rating Agencies: Deteriorating Subprime Mortgages, chart prepared by the Permanent Subcommittee on Investigations ........................................................................ 236 

e. Excerpts from Documents Related to Credit Rating Agencies: 

Grandfathering, chart prepared by the Permanent Subcommittee on 

Investigations ................................................................................................ 238 

f. Excerpts from Documents Related to Credit Rating Agencies: Chronic 

Resource Shortages, chart prepared by the Permanent Subcommittee 

on Investigations ............................................................................................ 240 

g. Revenue of the Three Credit Rating Agencies: 2002-2007. Source: this 

matter.com/money ......................................................................................... 242 

h. 2006 Originations and RMBS Issuance. Source: Standard & Poor’s 

Rating Services, U.S. Residential Mortgage Subprime Market, March 

29, 2007 .......................................................................................................... 243 

i. Percent of the Original AAA Universe Currently Rated Below Investment 

Grade. Source: Blackrock Solutions as of February 8, 2010. Prepared 

by the Permanent Subcommittee on Investigations ................................... 244 

j. Estimation of Housing Bubble: Comparison of Recent Appreciation vs. 

Historical Trends, chart prepared by Paulson & Co, Inc ............................ 245 

k. Biggest Clients of the Credit Rating Agencies. Source: Anna Katherine 

Barnett-Hart, ‘‘The Story of the CDO Market Meltdown,’’ March 2009 .. 246 

l. Cash Flow & Hybrid Mezzanine SF CDOs of ABS: Exposure to 

Subprime RMBS Collateral by Cohort. Source: Standard & Poor’s, 

‘‘Overview and Impact of the Residential Subprime Market,’’ March 

2007 ................................................................................................................. 247 

m. Typical Structure of a Residential Mortgage Backed Security. Source: 

Standard & Poor’s data. Prepared by the Permanent Subcommittee 

on Investigations ............................................................................................ 248 

Documents Related to Competitive Pressures Affecting Ratings 

Standard & Poor’s Documents: 

2. Standard & Poor’s internal email, dated May 2004, re: Competition with 

Moody’s (We just lost a huge Mizuho RMBS deal to Moody’s. . . . *** 

Losing one or even several deals due to criteria issues, but this is so 

significant that it could have an impact in the future deals.) ....................... 249 

3. Standard & Poor’s internal email, dated August 2004, re: SF CIA: CDO 

methodology invokes reactions (We are meeting with your group this week 

to discuss adjusting criteria for rating CDOs of real estate assets this 

week because of the ongoing threat of losing deals. *** Lose the CDO 

and lose the base business - a self reinforcing loop.) ...................................... 250 

4. Standard & Poor’s internal email, dated November 2004, re: APB Meeting 

- Nov 4 (I think the criteria process must include appropriate testing 

and feedback from the marketplace.) ............................................................... 254 

5. Standard & Poor’s internal email, dated March 2005, re: LEVELS 5.6(c) 

(Version 6.0 could’ve been released months ago and resources assigned 

elsewhere if we didn’t have to massage the sub-prime and Alt-A numbers 

to preserve market share. *** We have known for some time (based upon 

pool level data and LEVELS 6.0 testing) that—Subprime: B and BB 

levels need to be raised—ALT A: B, BB and BBB levels need to be 

raised (we have had a disproportionate number of downgrades) .................. 258 


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6. Standard & Poor’s internal email, dated June 2005, re: Privileged Criteria 

Deliberations: CWHEQ 2005-C (Why these questions come up every month 

is obvious—issuers don’t like the outcome. However, the right thing to 

do is to educate all the issuers and bankers and make it clear that 

these are the criteria and that they are not-negotiable. If this is clearly 

communicated to all then there should be no monthly questions. . . . 

*** Screwing with criteria to ‘‘get the deal’’ is putting the entire S&P 

franchise at risk—it’s a bad idea.) ................................................................... 261 

7. Standard & Poor’s internal email, dated February 2006, re: EMC Compares (I don’t think this is enough to satisfy them. What’s the next step?) ... 263 

8. Standard & Poor’s internal email, dated February 2006, re: comstock 

(If our current structure, which we have been marketing to investors 

and the mgr, (and which we have been doing prior to the release of 

the beta cash flow assumptions) doesn’t work under the new assumptions, 

this will not be good. Happy to comply, if we pass, but will ask for 

an exception if we fail . . .) .............................................................................. 267 

9. Standard & Poor’s internal email, dated May 2006, re: Privileged & 

Confidential Committee Deliberations - Madaket Funding (I submit for 

your consideration the banker’s argument to waive the one failing run.) ..... 269 

10.a. Standard & Poor’s internal email, dated May 2006, re: Broadwick Funding (It was a known flaw not only in that particular ABACUS trade, 

but in pretty much all ABACUS trades . . .) .............................................. 271 

b. Standard & Poor’s internal email, dated April 2006, re: ABACUS 2006- 

12 - Writedowns immediately prior to Stated Maturity (Don’t even get 

me started on the language he cites . . . which is one of the reasons 

I said the counterparty criteria is totally messed up.) ................................ 275 

c. Standard & Poor’s internal email, dated May 2005, re: Adirondack 

CDO (. . . this is exactly the kind of backroom decision-making that 

leads to inconsistent criteria, confused analysts, and pissed-off clients.) .. 279 

11. Standard & Poor’s internal email, dated May 2006, re: Confidential - 

Criteria Changes in LEVELS 5.7 (We certainly did intend to do anything 

to bump us off a significant amount of deals. *** [H]eard your ratings 

could be 5 notches back of moddys [sic] equivalent. [G]onna kill your 

resi biz.) ............................................................................................................. 287 

12. Standard & Poor’s internal email, dated June 2006, re: question on impact to CDOs (We assume this scenario to be negative for the corporate 

business because Moody’s will be giving out higher ratings on secured 

loans so issuers will be less likely to ask for an S&P rating on the 

issue.) ................................................................................................................. 288 

13. Standard & Poor’s internal email, dated August 2006, re: Can you call 

me? Have left you numerous messages (How many millions does Morgan 

Stanley pay us in the greater scheme of things? How many times have 

I accommodated you on tight deals?) .............................................................. 290 

14. Standard & Poor’s internal email, dated August 2006, re: Loss severity 

vs gross/net proceeds (They’ve become so beholden to their top issuers 

for revenue they have all developed a kind of Stockholm syndrome which 

they mistakenly tag as Customer Value creation . . .) .................................. 293 

Moody’s Documents: 

15. Moody’s internal email, dated December 2003, re: Noel Kirnon (The Derivatives team has achieved a year to date 96% market share compared 

to a target share of 95%.) ................................................................................. 295 

16. Moody’s internal email, dated January 2006, re: BES and PEs (Top 

Achievements in ‘‘05: 1. Protected our market share in the CDO corporate 

cash-flow sector . . .) ........................................................................................ 296 

17. Moody’s internal email, dated April 2006, re: Jay Siegel Exit Interview 

(He described RMBS as the worst team to work on at Moody’s. It is 

difficult to maintain market share in a market that has become 

commoditized and where Moody’s expected loss analysis means higher 

cost for issuers.) ................................................................................................. 297 

18. Moody’s internal email, dated April 2006, re: MGIC Home Re 2006- 

1 Committee#3 (At this point, I would feel comfortable keeping the previously committeed levels since such a large adjustment would be hard 

to explain to Bear, . . .) ................................................................................... 299 


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19. Moody’s internal email, dated May 2006, re: Magnolia 2006-5 Class Ds 

(I am worried that we are not able to given these complicated deals 

the attention they really deserve, and that they (CS) are taking advantage 

of the ‘‘light’’ review and the growing sense of ‘‘precedent’’.) .......................... 302 

20. Moody’s internal email, dated October 2006, re: managing expectations: 

2 different stories (I mention this to reinforce the expectation that concessions we make in the interest of getting the deal(s) rated will be used 

against us.) ........................................................................................................ 307 

21. Moody’s internal email, dated December 2006, re: legal points outstanding 

(Have been speaking to Plamen and my feeling is that the only way 

we’ll maybe get Taberna to agree to the covenants is if you rate down 

to Aa2 on the B Notes at the same levels as the other agencies.) ................... 308 

22. Moody’s internal email, dated March 2007, re: DQ Hit for Jake’s ACE 

Deal (I just spoke with Sue Valenti at Deutsche regarding this deal and 

she is resisting the changes to the LC levels. She is pushing back dearly 

saying that the deal has been marketed already and that we came back 

‘‘too late’’ . . .) ................................................................................................... 312 

23. Moody’s internal email, dated June 2007, re: Rating application for 

Belden Point CDO (We are okay with the revised fee schedule for this 

transaction. We are agreeing to this under the assumption that this will 

not be a precedent for any future deals and that you will work with 

us further on this transaction to try to get to some middle ground with 

respect to the ratings.) ...................................................................................... 315 

24.a. Moody’s internal email, dated October 2007, re: 3Q Market CoverageCDO (Market share by deal count dropped to 94%, though by volume 

it’s 97%. It’s lower than the 98+% in prior quarters. Any reason for 

concern, are issuers being more selective to control costs (is Fitch cheaper?) or is it an aberration.) ............................................................................ 318 

b. Moody’s internal email, dated October 2007, attached copy of Moody’s 

internal memorandum, Credit Policy issues at Moody’s suggested by 

the subprime/liquidity crisis, prepared by the Moody’s Chief Risk Officer ................................................................................................................... 319 

Documents Related to Ratings Methodology 

Standard & Poor’s Documents: 

25. Standard & Poor’s internal email, dated March 2005, re: Wachovia Report 

Cites Questions Of S&P’s Integrity (I would like to discuss how we plan 

on ultimately ‘‘spinning’’ our revised correlation assumptions . . .) ............. 324 

26. Standard & Poor’s internal email, dated May 2006, re: an error in the 

new correlation assumptions? (I have already brought this issue up and 

it was decided that it would be changed in the future, . . .) ........................ 326 

27. Standard & Poor’s internal email, dated December 2006, re: Synthetic 

CDO¥2 of ABS (both Cash and Synthetic) (Rating agencies continue 

to create and [sic] even bigger monster - the CDO market. Let’s hope 

we are all wealthy and retired by the time this house of cards falters.) ....... 328 

28. Standard & Poor’s internal email, dated January 2007, re: Summary 

of Conference Call (Can anyone give me a crash course on the ‘‘hidden 

risks in CDO’s of RMBS’’?) ............................................................................... 330 

29. Standard & Poor’s internal email, dated March 2007, re: Proposed plan 

for review of criteria (This is because our published criteria as it currently 

stands is a bit too unwieldy and all over the map in terms of being 

current or comprehensive. . . . our SF rating approach is inherently flexible and subjective, while much of our written criteria is detailed and 

prescriptive.) ...................................................................................................... 332 

30.a. Standard & Poor’s instant message, dated April 2007, (we rate every 

deal . . . it could be structured by cows and we would rate it) ................. 337 

b. Standard & Poor’s instant message, dated May 2007, (no body gives 

a straight answer about anything around here anyway *** how about 

we come out with new criteria or a new stress and actually have clear 

cut parameters on what the hell we are supposed to do) ............................ 338 


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31. Standard & Poor’s internal email, dated May 2007, re: Modelling of 

some spread compression on Static CDOs (. . . the cash-flow criteria 

from 2004 . . . actually states that . . . in the usual vague S&P’s way 

. . . Still, consistency is key for me and if we decide we do not need 

that, fine but I would recommend we do something. Unless we have 

too many deals in US where this could hurt.) ................................................ 340 

32. Standard & Poor’s internal email, dated July 2007, re: Weekly RMBS/ 

CDO Surveillance performance update (It remains to been [sic] seen if 

S&P is really prepared to witness drastic rating actions, just to avoid 

the slower ‘‘notching’’ process and public criticism.) ...................................... 344 

33. Standard & Poor’s internal email, dated September 2007, re: SIFMA 

Rating Agency Panel October 4 (I have tried to stay away from underlying 

rating performance and place the issue more on the newness of the underwriting standards that defied all common sense.) .......................................... 351 

34. Standard & Poor’s internal email, dated November 2007, re: Resi Mortgage Operations - Conduit & Originator Reviews (We believe our analytical process and rating opinions will be enhanced by an increased focus 

on the role third parties can play in influencing loan default and loss 

performance. . . . Should have been doing this all along.) ........................... 357 

Moody’s Documents: 

35. Moody’s internal email, dated January 2006, re: 2006 Priorities for M3 

team (Not recalibrating the Prime model and not fixing the simulation 

will create a growing number of inconsistencies (problems) in the existing 

models as was the case through most of 2004.) .............................................. 359 

36. Moody’s internal email, dated April 2006, re: Goldman CES Deal: Building OC with Cap (I am getting serious pushback from Goldman on a 

deal that they want to go to market with today. . . . Goldman needs 

more of an explanation (I do not know how to get around this without 

telling them we were wrong in the past).) ....................................................... 361 

37. Moody’s internal email, dated October 2006, re: Pro-rata modeling criteria 

(Our problem here is that nobody has told us about the changes that 

we are later expected to adhere to. Since there is no published criteria 

outlining the change in methodology how are we supposed to find out 

about it?) ............................................................................................................ 362 

38. Moody’s internal email, dated April 2007, (If in our opinion 15% of 

the ratings are inflated, the impact to the cdo note ratings would be 

significant.) ........................................................................................................ 366 

39. Moody’s internal email, dated June 2007, re: Please READ M-1 sign 

off (Over time, different chairs have been giving different guidelines at 

different point of time on how much over-enhancement we need for a 

bond to be notched up to Aaa, . . .) ................................................................ 367 

40. Moody’s internal email, dated August 2007, re: Seasoning benefit in AltA model is fully functional now (. . . maybe this is more like rearranging 

the deck chairs on the Titanic . . .) ................................................................ 368 

41. Moody’s internal email, dated August 2007, re: UBS CDO Research (This 

is depressing: ‘‘In our skewed sample of 111 mezzanine ABS CDOs, collateral losses extend into senior AAA tranches. We predict that 10% of senior 

AAA tranches we examined will default. Overall, the expected loss of 

senior AAA tranches is 1%. For BBB tranches, 55% will default and 

expected losses are 65%. This is horrible from a ratings and risk management point of view; perhaps the biggest credit risk management failure 

ever.’’) ................................................................................................................. 370 

42. Moody’s internal email, dated August 2007, re: Deal Management (. . . 

each of our current deals is in crisis mode. This is compounded by the 

fact that we have introduced new criteria for ABS CDOs. Our changes 

are a response to the fact that we are already putting deals closed in 

the spring on watch for downgrade. This is unacceptable and we cannot 

rate the new deals in the same away [sic] we have done before. . . . 

bankers are under enormous pressure to turn their warehouses into CDO 

notes.) ................................................................................................................. 372 


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43. Moody’s internal email, dated November 2007, re: Fitting a default model 

on 2006 Alt-A data (My staff is sensitive to both priorities and the risks 

associates with demands to do something ‘‘quick and dirty’’ that then 

becomes part of a rating process. The reason Ahish pushed back was 

that the proposed use of the data would quite likely lead to false conclusions that might be used for rating decisions.) ............................................... 373 

44. Moody’s internal email, dated November 2007, re: Moody’s Follow Up 

(It seems, though, that the more of the ad hoc rules we add, the further 

away from the data and models we move and the closer we move to 

building models that ape analysts expectations, no?) ..................................... 381 

Documents Related to Deteriorating Subprime Mortgages 

Standard & Poor’s Documents: 

45. Standard & Poor’s internal email, dated July 2005, re: Washington Mutual (I have been a mortgage broker for the past 13 years and I have 

never seen such a lack of attention to loan risk.) ............................................ 383 

46.a. Standard & Poor’s internal email, dated September 2006, re: Nightmare 

Mortgages (This is frightening. It wreaks of greed, unregulated brokers, 

and ‘‘not so prudent’’ lenders.) ...................................................................... 384 

b. Standard & Poor’s internal email, dated September 2006, re: Nightmare 

Mortgages (. . . this is like another banking crisis potentially looming!!) . 392 

47. Standard & Poor’s internal email, dated October 2006, forwarding a 

October 19, 2006, The Wall Street Journal article, More Home Loans 

Go Sour, and remarking about article, Pretty grim news as we suspected 

- note also the ‘‘mailing in the keys and walking away’’ epidemic has 

begun - I think things are going to get mighty ugly next year! ..................... 393 

48. Standard & Poor’s internal email, dated October 2006, forwarding a 

October 26, 2006, The Wall Street Journal article, Home Prices Keep 

Sliding; Buyers Sit Tight, and remarking about article, . . . just curious 

. . . are there ever any positive repots on the housing market? .................... 396 

49. Standard & Poor’s internal email, dated February 2007, re: Data sharing 

between surveillance and servicer evaluations (Also remember, our data 

is the aggregrate [sic] and most of the deals alledgely [sic] have better 

(cough, cough) subprime loans.) ....................................................................... 400 

50. Standard & Poor’s internal email, dated March 2007, re: Subprime Vintage Comparison (After 12 months of seasoning, the 2006 vintage had 

approximately 13% in total delinquencies, . . .) ............................................ 404 

51. Standard & Poor’s internal email, dated March 2007, forwarding a March 

8, 2007 BusinessWeek Online article, The Mortgage Mess Spreads; and 

remarking about article, This is like watching a hurricane from FL moving up the coast slowly towards us. ................................................................. 407 

52.a. Standard & Poor/American Legal & Financial Network email, dated 

March 2007, re: member firms reaction to troubled servicers (To give 

you a confidential tidbit among friends the subprime brou haha is 

reaching serious levels . . .) .......................................................................... 410 

b. Standard & Poor’s, Structured Finance Ratings - Overview and Impact 

of the Residential Subprime Market, Monthly Review Meeting, March 

19, 2007 .......................................................................................................... 412 

c. Standard & Poor’s internal email, dated March 2007, re: Pre-empting 

bad press on the subprime situation (In a meeting with Kathleen Corbet 

today, she requested that we put together a marketing campaign around 

the events in the subprime market, the sooner the better.) .......................... 439 

53. Standard & Poor’s internal email, dated April 2007, re: PWR 16 (. . . 

unbelievable . . . the bankers make shi**y loans with such skinny margins tha [sic] they can’t make any money and expect us to eat it. . . . 

the opportunity cost of doing the deal at that ridiculously low fee and 

risking eroding our pricing structure going forward was deemed too high 

. . .) ................................................................................................................... 441 


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54.a. Standard & Poor’s internal email, dated July 2007, re: Tomorrow’s 

FT Column - Saskia Sholtes (We did sound like the Nixon White House. 

Instead of dismissing people like him or assuming some dark motive 

on their part, we should ask ourselves how we could have so mishandled 

the answer to such an obvious question. I have thought for awhile 

now that if this company suffers from an Arthur Andersen event, we 

will not be brought down by a lack of ethics as I have never seen 

an organisation [sic] more ethical, nor will it be by greed as this plays 

so little role in our motivations; it will be arrogance.) ................................ 442 

b. Standard & Poor’s internal email, re: November 21, 2006 Q&A after 

Conference Call - How Bad is 2006 Subprime Collateral? (Although 

the Rating Agencies have ‘‘increased’’ their Loss Coverage %, David 

Liu thinks it will not compensate ‘‘enough’’ for the poor performance 

of year 2006 Subprime collateral. According to David, ‘‘the Rating Agencies were caught off guard, too!’’) ................................................................. 446 

55. Standard & Poor’s internal email, dated November 2007, re: November 

presentation (Macroeconomic factors as well as the combination of these 

higher risk characteristics coupled with fraud seem to be the most likely 

reasons for the anomalous behavior.) .............................................................. 449 

56. Excerpt from The McGraw-Hill Companies, Inc. Minutes, Regular Meeting 

of Board of Directors, December 5, 2007, (Mr. Terry McGraw noted the 

2005-06 vintage loans appear to be the key problem areas in the recent 

subprime situation.) .......................................................................................... 453 

Moody’s Documents: 

57. Moody’s internal email, dated April 2007, re: near future downgrades 

(Here is what I suggest. I will create a folder on the p-drive: . . . which 

stores info on subprime RMBS which were identified as potential ‘‘near 

future downgrades’’.) ......................................................................................... 457 

58. Moody’s internal email, dated November 2007, re: Overnightor NY - November 26th (You’re right about CDOs as WMD—but it’s only CDOs 

backed by subprime that are WMD.) ............................................................... 460 

Documents Related to Grandfathering 

Standard & Poor’s Documents: 

59. Standard & Poor’s internal email, dated June 2004, re: LEVELS (What 

happens when we migrate to 6.0? Will they want three versions in play, 

to facilitate pools structured across different time frames?) .......................... 463 

60. Standard & Poor’s internal email, dated June 2005, re: new CDO criteria 

(The overarching issue at this point is what to do with currently rated 

transactions if we do release a new version of Evaluator.) ............................ 466 

61. Standard & Poor’s internal email, dated July 2005, re: Evaluator 3 (This 

has become such an intractable mess!!) .......................................................... 468 

62. Standard & Poor’s internal email, dated October 2005, re: Tomorrow’s 

AM Agenda (How do we handle existing deals especially if there are 

material changes that can cause existing ratings to change?) ....................... 471 

63. Standard & Poor’s internal email, dated October 2005, re: CDO model 

(It raises several franchise level issues which could be viewed as precedent 

setting from a policy perspective.) .................................................................... 474 

64. Standard & Poor’s internal email, dated November 2005, re: Disclaimer 

- Help (Lord help our f**king scam . . .) ........................................................ 476 

65. Standard & Poor’s internal email, dated November 2005, re: E3 FAQ 

(We will also run all deals through both E3/Low and E3/High to determine if the result on E2.4.3 is within the tolerance levels.) ........................... 478 

66. Standard & Poor’s internal email, dated December 2005, re: Transition 

and ongoing surveillance process for E2.4.2 versus E3 (My view is that 

arrangers will be quite happy to hear that their deal falls within our 

acceptable tolerance levels and just get on with their trade.) ........................ 479 


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67. Standard & Poor’s internal email, dated December 2005, re: Call from 

Abby Moses, Derivatives Week re: status of CDO Evaluator 3 (. . . it 

would be helpful to have a policy framework communicated to the market 

on when S&P will apply new criteria in model derived ratings to outstanding transactions and when it won’t. . . . we are not being as transparent as we need to be.) .................................................................................. 483 

68. Standard & Poor’s internal email, dated December 2005, re: E3 docs 

(The important thing is to begin to ‘‘craft’’ the ‘‘politically correct’’ external 

tolerance band message.) .................................................................................. 486 

69. Standard & Poor’s internal email, dated January 2006, re: LNR ‘‘Rabo 

Tango are withdrawing any interest from LNR because they had a call 

with S&P who confirmed that this was being rated off the old methodology.’’) ............................................................................................................... 490 

70. Standard & Poor’s internal email, dated February 2006, re: Fixed Income 

Activity Report (Though the tolerance bands have provided some ‘‘cushion’’ 

as it pertains to mitigating a rating action based solely on a model 

based change . . . they have also created confusion given their lack of 

transparency.) .................................................................................................... 492 

71. Standard & Poor’s internal email, dated March 2006, re: Moody’s (The 

official Moody’s line is that there is no ‘‘grandfathering’’ and that old 

transactions are reviewed using the new criteria. However ‘‘the truth is 

that we do not have the resources to review thousands of transactions, 

so we focus on those that we feel are more at risk.’’) ...................................... 493 

72. Standard & Poor’s internal email, dated June 2006, re: RMBS LEVELS 

5.7 and its Impact on Outstanding Deals (different from cdo *** . . . 

although the RMBS Group does not ‘‘grandfather’’ existing deals, there 

is not an absolute and direct link between changes to our new ratings 

models and subsequent rating actions taken by the RMBS Surveillance 

Group.) ............................................................................................................... 494 

73. Standard & Poor’s internal email, dated November 2006, re: Hot Topics 

Polling Questions (Should S&P consider ‘‘grandfathering’’ existing ratings 

when implementing criteria changes?) ............................................................ 497 

74. Standard & Poor’s internal email, dated July 2007, re: Special APB 

meeting (How do we handle the grandfathering issue in the context of 

consistent application of criteria.) .................................................................... 500 

75. Standard & Poor’s internal email, dated October 2007, re: Here are 

thoughts around RMBS (Ratings no longer grandfather - need batch processing for all deals rated within 12 months of criteria or model changes) 

.......................................................................................................................... 502 

Moody’s Documents: 

76. Moody’s internal email, dated May 2007, re: Upcoming CLOs/ 

grandfathering list (We appreciate your willingness to grandfather these 

transactions w/r/t Moody’s old methodology.) ............................................... 504 

77. Moody’s internal email, dated May 2007, re: Stratford CLO (. . . they 

thought it would make sense to use the old methodology, . . .). ................... 506 

78. Moody’s internal email, dated June 2007, re: PDR/LGD methodology 

(It might be useful to know what our official position is on this issue 

in case it arises again.) ..................................................................................... 508 

79. Moody’s internal email, dated July 2007, re: Notching Status (Shall we 

still provide rating for those bond we did not rate then using the old 

methodology and the old loss coverage number?) ........................................... 510 

80. Moody’s Structured Finance Credit Committee, March 31, 2008, Meeting 

Notes (Rating changes when methodologies change . . . This decision 

to selectively review certain ratings is made due to resource constraints.) ... 512 

Documents Related to Chronic Resource Shortages 

Standard & Poor’s Documents: 

81. Standard & Poor’s, Framework For Analytics Policy Board Review of 

Rating Surveillance Standards, January 27, 2006, (A few areas (Asian 

Corporates, U.S. public power, student loans and less active RMBS issuers 

in the U.S.) are substantially below par.). (excerpt) ....................................... 514 


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82. Standard & Poor’s internal email, dated April 2006, re: Discussion with 

Lal (Each time I consider what my group is faced with, I become more 

and more anxious.) ........................................................................................... 522 

83. Standard & Poor’s internal email, dated June 2006, re: Temp (In addition 

to the project above that involved some 863 deals, I have a back log 

of deals that are out of date with regard to ratings.) ..................................... 524 

84. Standard & Poor’s internal email, dated December 2006, re: Please continue temps (Currently, there are nearly 1,000 deals with data loads 

aged beyond one month.) .................................................................................. 526 

85. Standard & Poor’s internal email, dated January 2007, re: Data COE 

Resources Available for US ABS (. . . I want to take a moment to reiterate 

my concerns regarding the significant deficit in terms of the # of analysts 

currently assigned to work on US ABS and RMBS data needs.) .................. 529 

86. Standard & Poor’s internal email, dated February 2007, re: Headcount 

for RMBS Surveillance? (I talked to Tommy yesterday and he thinks 

that the ratings are not going to hold through 2007. . . . We do not 

have the resources to support what we are doing now.) ................................. 531 

87. Standard & Poor’s internal email, dated February 2007, re: What’s the 

problem now??? (We really need help. Sub prime is going down hill. 

The 20% not covered in our system is also of great concern.) ........................ 535 

88. Standard & Poor’s internal email, dated April 2007, re: Staffing for 

RMBS Surveillance (This model shows that the R-Surv staff is short 

by 7 FTE - about 3 Directors, 2 AD’s, and 2 Associates.) .............................. 536 

89. Standard & Poor’s internal email, dated October 2007, re: Alt. A Aged 

List (. . . we will take the appropriate rating action on any of the deals 

that we reviewed that are on the aged list.) .................................................... 538 

Moody’s Documents: 

90. Moody’s internal email, dated January 2006, re: 2006 Priorities for M3 

team (As a new product, good idea—but I think we need full functionality 

w/M3 first, esp. if we’re to remain short-staffed for yet another year.) ........ 539 

91. Moody’s internal email, dated May 2007, re: Paper on inter-CDO correlations - update from ABS Steering Committee (Unfortunately, our analysts 

are owerwhelmed [sic] . . .) ............................................................................. 541 

92.a. Moody’s SFG 2002 Associate Survey, Highlights of Focus Groups and 

Interviews, May 2, 2002 ................................................................................. 543 

b. Moody’s Investor Service, BES-2005, Presentation to Derivatives Team, 

April 7, 2006 .................................................................................................. 559 

Documents Related to Failed Deals 

93.a. Moody’s internal email, dated December 2006, re: Subprime performance (Holy cow - is this data correct? I just graphed it and Freemont 

is such an outlier!!) ........................................................................................ 587 

b. Standard & Poor’s internal email, dated January 2007, re: Quick question: Fremont (No, we don’t treat their collateral any differently . . .) ..... 589 

c. Standard & Poor’s internal email, dated January 2007, re: Quick question: Fremont (Since Fremont collateral has been performing not so 

good, is there anything special I should be aware of?) ................................ 590 

d. Standard & Poor’s internal email, dated February 2007, forwarding 

a January 29, 2007 Reuters article, Defaults cause Fremont to end 

ties to 8,000 brokers ...................................................................................... 592 

e. Moody’s downgrade of GSAMP Trust 2007 - FM2 containing Fremont 

mortgages ....................................................................................................... 594 

f. Standard & Poor’s downgrade of GSAMP Trust 2007 - FM2 containing 

Fremont mortgages ........................................................................................ 595 

94.a. Standard & Poor’s instant message, dated April 2007, (i heard some 

fury . . . james yao at ubs) ........................................................................... 598 

b. Standard & Poor’s internal email, dated April 2007, re: Vertical 2007- 

1/UBS/James Yao (Don’t see why we have to tolerate lack of cooperation. Deals likely not to perform.) ................................................................. 599 


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c. Standard & Poor’s internal email, dated April 2007, re: VERTICAL 

ABS CDO 2007-1, LTD.UBS (Sarah and I have been working with 

James Yao from UBS but we have not been getting cooperation from 

him.) ................................................................................................................ 600 

d. Moody’s Pre-Closing Committee Memorandum, Closing: April 10, 2007, 

Deal: Vertical ABS CDO 2007-1, Ltd. (Vertical ABS CDO 2007-1, Ltd. 

is a mezzanine Hybrid ABS transaction that is expected to be 95% 

synthetic (CDS assets) at closing.) ............................................................... 601 

e. List of assets included in Vertical ABS CDO 2007-1, prepared by 

Moody’s ........................................................................................................... 614 

f. Moody’s internal email, dated October 2007, re: Updated: Rating Review 

Committee - Vertical ABS CDO 2007-1 EOD (Eric and I spoke to UBS. 

They said that they still have not decided whether to liquidate or keep 

the deal as is . . .) ......................................................................................... 617 

g. Fitch internal email, dated October 2007, re: Vertical Capital (. . . 

Vertical has over a dozen CDOs outstanding. Most of the 2007 deals 

we are reviewing are rapidly encountering serious difficulties . . .) ......... 618 

h. Standard & Poor’s internal email, dated October 2007, re: (BMP) 

Moody’s Downgrades Vertical ABS CDO 2007-1 Notes; Further (Oh, 

well. The cat is out of the bag.) .................................................................... 620 

i. Moody’s internal email, dated October 2007, re: Debtwire: (DW) ABS 

CDOs begin to liqudate; rating agency downgrades ‘‘detonating’’ market, 

source says (. . . the picture is not pretty.) ................................................. 624 

j. Standard & Poor’s internal email, dated October 2007, re: Vertical CDO 

2007-1 (. . . this is fairly urgent . . . We want to review this transaction 

and see the results under the worst possible outcome.) ............................... 626 

k. Moody’s downgrade of Vertical ABS CDO 2007-1, Ltd. ............................. 629 

l. Excerpts from Connecticut Superior Court Memorandum Of Decision 

on Plantiffs’’ Application For A Prejudgment Remedy (#124), Pursuit 

Partners, LLC et al v. UBS AG et al, September 8, 2009. (excerpts) ....... 630 

m. UBS internal email, dated August 2007, re: Mezz CDO Offerings (Here 

is some new stuff we would offer the vertical . . .) ..................................... 642 

n. UBS internal email, dated August 2007, (sold some more crap to pursuit.) ............................................................................................................... 644 

o. UBS internal email, dated July 2007, re: ABS Subprime & Moody’s 

downgrades (It sounds like Moodys is trying to figure out when to 

start downgrading, and how much damage they’re going to cause— 

they’re meeting with various investment banks.) ......................................... 645 

95.a. Moody’s internal email, dated July 2007, re: Analyst for Brighton (The 

reason is that Delphinus was a mezz deal with a lot of cushion, so 

we did not really care that much.) ................................................................ 646 

b. Standard & Poor’s internal email, dated August 2007, re: Delphinus 

closing date vs effective date (Yes, the concern is that the deal would’ve 

never passed (and actually would’ve been worse) if they included the 

assets that they claimed they are dummies.) ............................................... 647 

c. Excerpt from Moody’s Main Rating Change Report for Delphinus CDO 

2007-1, Ltd. .................................................................................................... 651 

d. Moody’s downgrade of Delphinus CDO 2007-1, Ltd. .................................. 652 

e. Standard & Poor’s downgrade of Delphinus CDO 2007-1 Ltd. ................. 654 

96.a. Standard & Poor’s internal email, dated August 2007, re: S&P CDO 

Monitor Kodiak CDO I: Urgent (Next thing I know, I’m told that because 

it had gone effective already, it was surveillance’s responsibility, and 

I never heard about it again.) ....................................................................... 657 

b. Moody’s downgrade of Kodiak CDO I, Ltd. ................................................. 662 

c. Standard & Poor’s downgrade of Kodiak CDO I, Ltd. ................................ 663 

97.a. Moody’s letters assigning rating to Long Beach RMBS, January - December, 2006 .................................................................................................. 665 

b. Washington Mutual, 2006 Transaction Statistics, re: Long Beach RMBS 

transactions ................................................................................................... 677 

c. Status of selected Long Beach RMBS transactions, as of April 19, 

2010 ................................................................................................................ 678 


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Other Documents 

98. Moody’s Investors Service: Managing Director’s Town Hall Meeting, September 10, 2007, (What happened in ‘‘04 and ‘‘05 with respect to subordinated traunches is that our competition, Fitch and S&P, went nuts. Everything was investment grade. It really didn’t matter.) .................................... 684 

99. Excerpts from Standard & Poor’s and Moody’s Downgrades, July 10- 

12, 2007 and January 30, 2008 ....................................................................... 765 

100. Fitch Ratings, Structured Finance, The Impact of Poor Underwriting 

Practices and Fraud in Subprime RMBS Performance, November 28, 

2007 .................................................................................................................. 776 

101. Goldman Sachs internal email, dated November 2007, re: NYT (Of 

course we didn’t dodge the mortgage mess. We lost money, then made 

more than we lost because of shorts.) ............................................................ 787 

102. Goldman Sachs internal email, dated October 2007, re: Early post on 

P and L (Sounds like we will make some serious money *** Yes we 

are well positioned) ......................................................................................... 788 

103. Goldman Sachs internal email, dated May 2007, re: LBML 06A (bad 

news . . . wipes out the m6s and makes a wipeout on the m5 imminent 

. . . costs us about 2.5mm . . . good news . . . we own 10mm protection 

on the m6 marked at $50 . . . we make $5mm) ........................................... 790 

104. Goldman Sachs internal email, dated July 2007, re: Private & Confidential: FICC Financial Package 07/25/07 (Tells you what might be happening to people who don’t have the big short.) ............................................ 792 

105. White Paper on Rating Agency Reform prepared by Arturo Cifuentes 

and Jose Miguel Cruz, Department of Industrial Engineering, University 

of Chile, Santiago, Chile, May 2010 .............................................................. 794 

106. Responses to supplemental questions for the record submitted to Raymond W. McDaniel, Jr., Chairman and Chief Executive Officer, Moody’s 

Corporation ...................................................................................................... 803 

107. Responses to supplemental questions for the record submitted to Yuri 

Yoshizawa, Group Managing Director, Structured Finance, Moody’s Investors Service ................................................................................................ 927 

108. Responses to supplemental questions for the record submitted to Peter 

D’Erchia, Current Managing Director, U.S. Public Finance (Former 

Global Practice Leader, Surveillance), Standard & Poor’s .......................... 931 

109. Richard Blumenthal, Attorney General, State of Connecticut, prepared 

statement ......................................................................................................... 1201 


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(1) 

WALL STREET AND THE FINANCIAL CRISIS: 

THE ROLE OF CREDIT RATING AGENCIES 

FRIDAY, APRIL 23, 2010 

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:36 a.m., in room 

SD–G50, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin and Kaufman. 

Staff Present: Elise J. Bean, Staff Director and Chief Counsel; 

Mary D. Robertson, Chief Clerk; David H. Katz, Counsel; Laura E. 

Stuber, Counsel; Adam Henderson, Professional Staff Member; 

Christopher Barkley, Staff Director to the Minority; and Anthony 

G. Cotto, Counsel to the Minority; Kevin Rosenbaum, Research 

Clerk; Robert Kaplan, Intern; Ryan McCord, Law Clerk; Ted 

Schroeder and Nhan Nguyen (Senator Kaufman). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. Today’s hearing is the 

third in a series of Subcommittee hearings focusing on some of the 

causes and consequences of the 2008 financial crisis, a man-made 

economic assault on our country that is still foreclosing on homes, 

shuttering businesses, and driving unemployment. We saw the beginning of the assault in our first two hearings, which examined 

how U.S. financial institutions turned to high-risk lending strategies to earn quick profits, dumping hundreds of billions of dollars 

in toxic mortgages into the financial system, like polluters dumping 

poison upstream in a river. At the second hearing, we showed how 

regulators saw what was going on, understood the risk, but sat on 

their hands or fought each other rather than stand up to the banks 

which were profiting from the pollution. 

Those toxic mortgages were scooped up by Wall Street firms that 

bottled them in complex financial instruments and turned to the 

credit rating agencies to get a label declaring them to be safe, lowrisk, investment-grade securities. Today, we are focusing on the 

role played by the credit rating agencies. Next week, we will look 

at the last stage of the economic assault, when Wall Street investment bankers magnified and spread the risk posed by toxic mortgages through the use of complex structured finance transactions. 

For a hundred years, Main Street investors trusted U.S. credit 

rating agencies to guide them toward safe investments. Even soVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000017 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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1See Exhibit No. 1g, which appears in the Appendix on page 242. 

phisticated investors, like pension funds, municipalities, insurance 

companies, and university endowments, have relied on credit ratings to protect them from Wall Street excesses and distinguish between safe and risky investments. 

But now that trust has been broken. We have used as case histories the two biggest credit rating agencies in the United States, 

Moody’s and Standard & Poor’s, and the ratings they gave to the 

key financial instruments that fueled the financial crisis—residential mortgage backed securities (RMBSs), and collateralized debt 

obligations (CDOs). The Subcommittee investigation found that 

those credit rating agencies allowed Wall Street to impact their 

analysis, their independence, and their reputation for reliability. 

And they did it for the money. 

This chart, Exhibit 1g,1 shows that from 2002 to 2007, the three 

top credit rating agencies doubled their revenues, from less than $3 

billion to over $6 billion per year. Most of this increase came from 

rating complex financial instruments. According to Standard & 

Poor’s, between 2000 and 2006, investment banks underwrote nearly $2 trillion in mortgage-backed securities, $435 billion or 36 percent of which were backed by subprime mortgages. All of those securities needed ratings. Moody’s and S&P each rated about 10,000 

RMBS securities over the course of 2006 and 2007. Credit rating 

executives got paid Wall Street-sized salaries. 

At the same time, the credit rating agencies were operating with 

an inherent conflict of interest, because the revenues they pocketed 

came from the companies whose securities they rated. It is like one 

of the parties in court paying the judge’s salary or one of the teams 

in a competition paying the salary of the referee. The credit rating 

agencies assured Congress and the investing public that they could 

‘‘manage’’ that conflict and that their ratings were independent and 

rigorous. But the documents tell a different story. 

First, some background. Credit ratings assess the creditworthiness of a particular financial instrument like a corporate bond, 

mortgage-backed security, or CDO. Essentially, they predict the 

likelihood that the debt will be repaid. We have all heard of AAA 

ratings, which are at the top of the credit rating scale and are supposed to designate the safest investments. The ratings below that, 

which range from AA down to C, designate investments at greater 

risk of default. Investments with AAA ratings have historically had 

an expected loss rate of less than 0.05 percent, while the expected 

loss rate for BBB investments is under 1 percent. That is why financial instruments with AAA through BBB ratings are generally 

called ‘‘investment grade,’’ while those with ratings of BBB or Baa3 

or below are referred to as ‘‘below investment grade’’ or sometimes 

‘‘junk’’ investments. 

A variety of U.S. laws and regulations rely on credit ratings to 

gauge risk. For example, the amount of risk-based capital that a 

bank must hold is determined in part by the credit ratings of its 

investments. Some investors, like pension funds, are barred from 

holding below-investment-grade assets. Because so many statutes 

and regulations reference ratings, issuers of securities and other fiVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000018 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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nancial instruments work hard to obtain favorable credit ratings to 

ensure more investors can buy their products. 

Over the last 10 years, Wall Street has engineered ever more 

complex financial instruments for sale to investors. Because these 

so-called structured finance products are so hard to understand, investors often place heavy reliance on credit ratings to determine 

whether they can or should buy them. 

Residential mortgage-backed securities (RMBSs), are one of the 

oldest types of structured finance. To create these securities, 

issuers bundle up large numbers of home mortgages into a pool, 

figure out the total revenue coming into the pool from all the mortgages, and then design a ‘‘waterfall’’ that assigns portions of the 

total incoming revenue to what are called ‘‘tranches.’’ Tranches are 

not collections of mortgages; they are simply recipients of income 

from the waterfall of mortgage payments coming into the pool. 

Each tranche is used to issue a mortgaged-backed security that 

receives a credit rating and is then sold to investors. The tranches 

that are first in line to receive revenues represent the safest investments in the pool and are designed to get AAA ratings. Tranches 

lower down the line get their revenues only after the more senior 

tranches are paid, and their securities get lower credit ratings. 

Wall Street did not stop there. They collected securities from 

RMBS transactions, put those into a pool, and resecuritized them 

into what are called collateralized debt obligations (CDOs). A CDO 

might contain, for example, BBB-rated securities from 100 different 

residential mortgage pools. CDOs often also contain other types of 

assets, such as corporate bonds or credit default swaps. Wall Street 

firms also created so-called synthetic CDOs which did not contain 

actual assets but simply referenced them. Like RMBS mortgage 

pools, CDOs were sliced and diced into tranches and the resulting 

tranches used to create securities. The securities were rated—some 

AAA—and then sold to investors. 

In exchange for large fees, Wall Street firms helped design the 

RMBS and CDO securities, worked with the credit rating agencies 

to obtain favorable ratings, and then sold the securities. Without 

credit ratings, Wall Street would have had a much harder time 

selling those products because each investor would have had to rely 

on themselves to figure them out. Credit ratings helped make the 

sales possible by labeling certain investments as safe, using their 

trademark AAA ratings. 

Wall Street firms also used financial engineering to combine 

AAA ratings—normally reserved for ultra-safe investments—with 

riskier securities, such as RMBS securities backed by high-risk 

mortgages. Because the underlying mortgages were high risk, those 

RMBS securities paid out a higher rate of return than safer loans. 

When those higher-paying securities also got AAA ratings, investors snapped them up. 

For a while, everyone made money: banks and mortgage brokers 

got rich selling high risk loans, Wall Street investment banks 

earned big fees creating and selling mortgage-based securities, and 

investors profited from the higher returns. 

But those AAA ratings created a false sense of security. Highrisk RMBS and CDOs turned out not to be safe investments. We 

heard in our first hearing how many of the high-risk mortgages 


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1See Exhibit No. 94b, which appears in the Appendix on page 599. 

backing those securities were riddled with poor-quality loans, contained fraudulent borrower information, or depended upon borrowers being able to refinance their loans before higher loan payments kicked in. When housing prices stopped climbing and many 

borrowers could no longer refinance their loans, delinquency rates 

skyrocketed. RMBS and CDO securities rated as investment grade 

began incurring losses and were sharply downgraded. 

For example, take a CDO known as Vertical ABS CDO 2007-1. 

In early 2007, UBS, which is a major bank, asked Standard & 

Poor’s and Moody’s to rate this CDO. The UBS banker, however, 

failed to cooperate with the analysts. One S&P analyst wrote in an 

email to colleagues: ‘‘Don’t see why we have to tolerate lack of cooperation. Deals likely not to perform.’’ That is Exhibit 94b.1

Despite the analyst’s judgment that the CDO was unlikely to 

perform, Standard & Poor’s rated it anyway. So did Moody’s. In 

April 2007, both agencies gave AAA ratings to the CDO’s top four 

tranches. But just 6 months later, both agencies downgraded the 

CDO, which later collapsed. One of the purchasers, a hedge fund 

called Pursuit Partners, sued over the CDO’s quick demise. Standard & Poor’s and Moody’s were dropped from the lawsuit since current law does not authorize private lawsuits against them even for 

reckless or unreasonable ratings, but the court ordered UBS to set 

aside $35 million for a possible award to the investor. The legal 

pleadings included internal emails at UBS referring to the supposedly investment-grade Vertical securities as ‘‘crap’’ at the same 

time the bank was selling them. 

Take another example. In January 2007, S&P was asked to rate 

an RMBS being assembled by Goldman Sachs using subprime 

loans from Fremont Investment and Loan, a subprime lender 

known for loans with high rates of delinquency. On January 24, 

2007, an analyst wrote seeking advice from two senior analysts: ‘‘I 

have a Goldman deal with subprime Fremont collateral. Since Fremont collateral has been performing not so good, is there anything 

special I should be aware of?’’ One of the analysts responded: ‘‘No, 

we don’t treat their collateral any differently.’’ And the other analyst asked a question: ‘‘Are the FICO scores current?’’ Answer: 

‘‘Yup,’’ came the reply. Then, ‘‘You are good to go.’’ 

In other words, the analyst did not have to factor in any greater 

credit risk for an issuer known for poor-quality loans, even though 

3 weeks earlier S&P analysts had circulated an article about how 

Fremont had severed ties with 8,000 brokers due to loans with 

some of the highest delinquency rates in the industry coming from 

those brokers. In the spring of 2007, Moody’s and Standard & 

Poor’s provided AAA ratings for five tranches of RMBS securities 

backed by Fremont mortgages. By October, both companies began 

downgrading the CDO. Today all five AAA tranches have been 

downgraded to junk status. 

Now, those are just two examples of securities given AAA ratings 

that turned out not to be worth the paper that they were written 

on. And there are many more. 

In fact, throughout 2006 and 2007, the toxic mortgages flooding 

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1See Exhibit No. 1i, which appears in the Appendix on page 244. 

quency rates skyrocketed. It became more and more apparent that 

the investment grade ratings given to subprime RMBS securities 

could not hold. 

Finally, in July 2007, within days of each other, Moody’s and 

Standard & Poor’s announced mass downgrades of hundreds of 

subprime mortgage-backed securities. The mass downgrades 

shocked financial markets, and the subprime secondary market 

dried up overnight. Banks, securities firms, pension funds, and others were left holding billions of dollars of suddenly unmarketable 

securities. The value of those securities began dropping like a 

stone, and the financial crisis was on. 

Two months later, in October, Moody’s began downgrading over 

$10 billion of CDOs. On January 30, 2008, Standard & Poor’s 

downgraded over 8,000 securities, including 6,300 RMBS and 1,900 

CDO securities, an unprecedented onslaught of downgrades. The 

CDO market, like the RMBS market, evaporated. Financial firms 

around the world were suddenly stuck with even more unmarketable securities, and by September 2008, major global financial institutions like Lehman Brothers, AIG, Citibank, Goldman Sachs, 

and Morgan Stanley were either bailed out, bankrupt, or struggling. 

Looking back, if any single event can be identified as the immediate trigger of the 2008 financial crisis, my vote would be for the 

mass downgrades starting in July 2007, when the credit rating 

agencies realized that their AAA ratings would not hold, and finally stopped labeling toxic mortgages as safe investments. Those 

mass downgrades hit the markets like a hammer, making it clear 

the investment grade ratings had been a colossal mistake. 

This chart, Exhibit 1i,1 shows just how big a mistake it was. It 

shows that 91 percent of the AAA subprime RMBS securities 

issued in 2007 and 93 percent of those issued in 2006 have since 

been downgraded to junk status. The numbers for Option ARM 

mortgages are even worse. Option ARMs, which we examined at 

our first hearing on Washington Mutual Bank, allow borrowers to 

pick from several types of payments each month, including a ‘‘minimum payment’’ that results in a growing, rather than declining, 

loan balance. The chart shows that 97 percent of the Option ARM 

securities issued in 2006 and 2007 are now in junk status. 

Had the credit rating agencies taken more care in handing out 

their initial ratings or had they issued downgrades in a more responsible manner, they could have reduced the impact of the toxic 

mortgages. But they did not, and there are a whole host of reasons 

why. 

First, let us talk about the credit rating models. Credit rating 

agencies use complex mathematical models to predict foreclosure 

rates for mortgages which, in turn, are critical to determine the 

ratings for mortgage-backed securities. The key problem was that 

the mortgage industry had changed drastically in the last 10 years. 

High-risk mortgages like subprime, interest-only, Option ARMs, 

and hybrids became widespread, displacing traditional, low-risk, 

30-year fixed-rate mortgages. The credit rating agencies simply did 

not have data on how these higher-risk mortgages would perform 


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1See Exhibit No. 23, which appears in the Appendix on page 315. 

over time. Traditional 30-year fixed-rate mortgages had default 

rates of 1 to 2 percent; the higher-risk mortgages were expected to 

have higher default rates, but no one knew how high. With very 

little data, the credit rating agencies made assumptions in their 

models that turned out to be way wrong. 

Moody’s and S&P knew their modeling assumptions were wrong 

and began revising their models. In the summer of 2005, S&P had 

revamped its CDO model, but put the model on hold for more than 

a year, as it struggled to rationalize why it would not use the new 

model to retest existing CDO securities. It is clear from over a year 

of internal emails that S&P delayed and delayed the decision, anticipating that the revised model would require existing CDO securities to be downgraded, disrupt the CDO market, and reduce public confidence in its CDO ratings. It would also have disrupted S&P 

profits from CDO ratings. 

In July 2006, S&P made a major change to its RMBS rating 

model, but decided not to retest existing RMBS securities. The revised RMBS model projected much higher default rates for highrisk mortgages and required greater protections against loss, including 40 percent more credit protection for BBB-graded subprime 

securities. That meant a 40-percent larger cushion to protect 

against losses. Re-evaluating existing RMBS securities with the revised model would likely have led to downgrades, angry issuers, 

and even angrier investors, so S&P did not do it. Moody’s did not 

either; after strengthening its RMBS model to issue new ratings, 

it chose not to apply it to existing securities. Recently, S&P has 

adopted a policy requiring retesting of rated securities within 1 

year of a model change. 

A second reason the credit rating agencies did not blow the whistle sooner on poorly performing RMBS and CDO securities was 

competition. The drive for market share and the revenues from increased volumes of ratings created pressure on both agencies to 

provide favorable credit ratings to the investment bankers bringing 

in business. 

A 1995 article captures how the credit agencies used to operate. 

A journalist wrote: ‘‘Ask a treasurer for his opinion of rating agencies, and he will probably rank them somewhere between a trip to 

the dentist and an IRS audit. You cannot control them, and you 

cannot escape them.’’ Well, all that changed as the revenues from 

structured finance ratings came pouring in. 

Ratings and fees began to be played off against each other. For 

example, after a Moody’s analyst emailed that he could not finalize 

a rating until the issue of fees was resolved, an investment banker 

from Merrill Lynch responded: ‘‘We are okay with the revised fee 

schedule for this transaction. We are agreeing to this under the assumption that this will not be a precedent for any future deals and 

that you will work with us further on this transaction to try and 

get to some middle ground with respect to the ratings.’’1 Now, 

Moody’s assured the Merrill analyst that its deal analysis was 

independent from its fees. Nonetheless, that is what Merrill was 

asking for. 


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1See Exhibit No. 5, which appears in the Appendix on page 258. 

2See Exhibit No. 14, which appears in the Appendix on page 293. 

3See Exhibit No. 1d, which appears in the Appendix on page 236. 

In another email, an S&P analyst commented: ‘‘Version 6.0 [of 

the ratings model] could’ve been released months ago and resources 

assigned elsewhere if we didn’t have to massage the sub-prime and 

Alt–A numbers to preserve market share.’’1 Some witnesses here 

today will describe how the environment changed from an academic 

culture focused on accurate ratings to one of intense pressure to get 

the deals done and preserve market share. 

The documents also show how the crushing volume of ratings undermined the ratings process. Despite record profits, both credit 

rating agencies were understaffed and overwhelmed with complex 

deals that investment bankers wanted to close within days. The 

documents show how investment bankers argued with the credit 

rating analysts, substituted worse assets at the last minute, and 

pressured analysts to waive their procedures and standards. We 

even saw instances of bankers pushing to remove analysts who 

were not playing ball. And at times, analysts who resisted banker 

demands or challenged ratings were restricted from rating deals. 

A focus on short-term profits also permeated the industry. One 

of the witnesses here today will describe how when he once questioned a banker about the terms of a deal, the banker replied, 

‘‘IBG–YBG.’’ When asked what that meant, the banker explained, 

‘‘I’ll be gone, you’ll be gone.’’ In other words, why give me a hard 

time when we are both making a lot of money and will be long 

gone before the house of cards comes crashing down? 

In addition to inaccurate models and competitive pressures, the 

credit rating agencies failed to adjust their ratings to take into account credit risks from the fraud and lax underwriting standards 

that increasingly characterized the mortgages securitized and sold 

on Wall Street. 

In August 2006, an S&P employee wrote: ‘‘[T]here has been 

rampant appraisal and underwriting fraud in the industry for quite 

some time as pressure has mounted to feed the origination machine.’’2 In September 2006, another S&P employee wrote: ‘‘I think 

it is telling us that underwriting fraud, appraisal fraud, and the 

general appetite for new product among originators is resulting in 

loans being made that should not be made.’’3 A colleague responded 

that the head of the S&P Surveillance Group ‘‘told me that broken 

down to loan level what she is seeing in losses is as bad as high 

40’s—low 50 percent. I would love to be able to publish a commentary with this data but maybe too much of a powder keg.’’ 

Well, not taking into account mortgage fraud and lax underwriting 

standards did, indeed, turn into a powder keg, one that helped 

blow up the RMBS and CDO markets and triggered the 2008 financial crisis. 

In the fall of 2007, Moody’s CEO Ray McDaniel called a town 

hall meeting to talk to his employees after the mass downgrades 

that shut down the subprime market. ‘‘What happened in 2004 and 

2005,’’ he said, ‘‘is that our competition, Fitch & S&P, went nuts. 


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1See Exhibit No. 98, which appears in the Appendix on page 684. 

Everything was investment grade. It really didn’t matter[.] . . . No 

one cared because the machine just kept going.’’1

A Moody’s managing director later responded our ‘‘errors make 

us look either incompetent at credit analysis, or like we sold our 

soul to the devil for revenue, or a little bit of both.’’ He said, ‘‘I 

would like more candor from senior management about our errors 

and how we will address them in the future.’’ 

That is what we are calling for today as well: candor not only 

about what went wrong, but what can be done to prevent still another credit rating disaster in the future. The House and the Senate financial reform bills before Congress offer a number of measures to increase credit rating oversight. Both bills would, for example, eliminate the statutory prohibition on the SEC’s evaluating 

rating models, though clearer language authorizing the SEC to set 

standards for credit rating models, methodologies, and criteria is, 

in my judgment, still needed. The bills would also beef up the 

SEC’s enforcement authority toward credit rating agencies and 

subject the agencies to lawsuits by investors for reckless or unreasonable ratings. The bills should be further strengthened, in my 

judgment, by directing regulators to tackle the inherent conflicts of 

interest that arise when rating agencies are paid by the people that 

they rate. Our investigation provides strong support for better controls on credit rating agencies whose failures contributed to the 

economic damage still plaguing our country. 

One more matter. Yesterday, the Subcommittee was made aware 

of a longer version of an email that was included in the Exhibit 

Book as Exhibit 23. We were not aware of the longer version earlier when that book was put together, so we have added it to the 

book as Exhibit 23 Addendum. The emails show Merrill Lynch trying to make a direct link between the fees it paid and the ratings 

it would receive on a deal, but the longer email shows that Moody’s 

told Merrill Lynch that its deal analysis was independent of any 

fee discussion. And that was surely a welcome response, but a very 

inappropriate request on the part of Merrill Lynch. 

My Ranking Member, Senator Coburn, had planned on being 

here today and had looked forward to it, but he was called away 

to matters in Oklahoma, so we will have to proceed without him. 

I do want to thank him and his staff again for their tremendous 

ongoing support of this investigation. 

I want to call on Senator Kaufman, who has also been a major 

supporter of what we are trying to do on this Subcommittee, and 

we are very grateful for his being on this Subcommittee and for 

that great participation. Senator Kaufman. 

Senator KAUFMAN. Thank you, Mr. Chairman, and thank you for 

holding this hearing, and I thank the witnesses. 

Since this meltdown occurred, as I travel around, after concern 

about jobs, the single most concern is about what happened on 

Wall Street and what are we going to do about it. And I got to tell 

you that the most scorn is on the rating agencies. That may not 

be deserved, but that is where it is, the idea that, as the Chairman 

said, you had this incredible growth in revenues at the same time 

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ties AAA that now turn out to be junk. AAA to junk is just a hard 

thing for people to deal with. How can you miss so badly? 

The problem we are dealing with today is what happened, but 

really more important is what are we going to do about it? I think 

both are important. AAA will never mean again what it used to 

mean. I do not care what we do here. I do not care what happens. 

AAA will not mean what it used to mean because people are just 

beginning to determine the incredible conflict of interest the Chairman pointed out, and also the way that rating agencies have protected and the way they view their job, when you hear them talk 

about the fact that they really have no responsibility to the average 

investor out there. That is not their customer. The customers are 

the people that just does not go with people. People do not understand that. 

The problem is, outside of the great people that inhabit the 

United States, that the two greatest things that make this country 

great are democracy and our capital markets. That is what makes 

us great. And the credibility of our capital markets is in tatters. 

Now, fortunately, in the rest of the world, they have capital markets where you even take a greater chance in many cases to get 

involved. But I do not think that is beginning to be the perception. 

And the idea that the average person cannot use rating agencies 

to determine the quality of the product means very simply people 

will stop using the product. Our markets will no longer be credible. 

They have lost a lot of credibility already. 

If we do not deal with this, this is not something we are just 

going on as business as usual. I spend a lot of time in New York. 

I spent a lot of time with people in New York. They think, oh, well, 

over that, now we are on to the next thing. It is not going to be 

that way. This is not going to go on forever. Our markets, if we lose 

our credibility, not only have the folks on Wall Street lost an incredible business, not only the rating agencies an incredible business, but the United States of America has lost one of the keys to 

its success. So what the Chairman is doing here with these hearings is incredibly important if we are going to maintain the credibility of our U.S. markets. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Kaufman. 

Now let me welcome our first panel of witnesses for this morning’s hearing: Frank Raiter, Former Managing Director for Mortgage-Backed Securities at Standard & Poor’s; Richard Michalek, 

Former Vice President and Senior Credit Officer for the Structured 

Derivative Products Group at Moody’s; Eric Kolchinsky, a Former 

Team Managing Director of the Structured Derivative Products 

Group at Moody’s Investors Service; and, finally, Dr. Arturo 

Cifuentes, a Former Moody’s Senior Vice President and current Director of the Finance Center at the University of Chile in Santiago, 

Chile. We thank you for coming a great distance. 

Mr. Raiter, I understand that you are here under a subpoena, 

but I appreciate all of you being here, whether a subpoena was 

issued or not. We appreciate your being with us this morning. We 

look forward to your testimony. 

We have a rule on this Subcommittee that all witnesses who testify before the Subcommittee are required to be sworn, so at this 


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1The prepared statement of Mr. Raiter appears in the Appendix on page 114. 

time I would ask all of you to please stand and raise your right 

hand. Do you swear that the testimony you are about to give will 

be the truth, the whole truth, and nothing but the truth, so help 

you, God? 

Mr. RAITER. I do. 

Mr. MICHALEK. I do. 

Mr. KOLCHINSKY. I do. 

Mr. CIFUENTES. I do. 

Senator LEVIN. We have a timing system here that does the following: About a minute before the red light comes on, you will see 

the light change from green to yellow, which will give you an opportunity to conclude your remarks. Your written testimony will be 

printed in the record in its entirety. We would ask that you attempt to limit your oral testimony to no more than 5 minutes. 

Mr. Raiter, I think we will have you go first. 

TESTIMONY OF FRANK L. RAITER,1 FORMER MANAGING DIRECTOR, RESIDENTIAL MORTGAGE RATING GROUP, STANDARD & POOR’S 

Mr. RAITER. Good morning, Senator Levin and Senator Kaufman. 

From 1995 until my retirement in 2005, I was the Managing Director and head of Residential Mortgage Ratings at Standard & 

Poor’s. As such, I think I had an inside view of the role of rating 

agencies in the recent economic crisis. 

The failure of the major rating agencies—Fitch, Moody’s and 

Standard & Poor’s—to adequately assess the risks associated with 

new mortgage products introduced in the past decade is the result 

of several factors. The first was the lack of oversight of the rating 

agencies by the SEC and the various financial regulatory bodies 

that wrote regulations requiring ratings. The second was the impact these decisions had on management of the rating agencies. 

And the third factor was the disconnect between senior managers 

and the analytical managers responsible for assigning ratings. The 

final factor was the separation of the initial ratings process from 

the subsequent surveillance of performance of the rated bonds. 

The first factor, a lack of regulatory oversight, resulted from the 

failure of regulators to appreciate the unique position the rating 

agencies assumed in the financial markets. The rating agencies 

were granted their preferred status by the SEC. Other regulators 

followed suit and incorporated ratings into their investment and 

capital rules. There was no regulatory oversight nor were standards established to measure the performance or quality of ratings. 

The preferred position of the rating agencies led directly to the 

second factor. Management of the rating agencies came to believe 

that the increasing revenues and profits they were enjoying were 

the results of superior management skill and insight rather than 

the oligopoly granted them by the various regulators and the accommodative Federal Reserve interest rates. This success bred 

complacency and an aversion to change. 

This resistance to change was a primary cause of the failure of 

the ratings and the ultimate financial crisis. Analytical managers 

were driven by the desire to create and implement the best risk 


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analytics and methodologies possible. Senior management, on the 

other hand, was focused on revenue, profit, and ultimately share 

price. Management wanted increased revenues and profit while analysts wanted more staff, data, and IT support which increased expenses and obviously reduced profit. 

In the Residential Mortgage Ratings Group, as in all the rating 

groups in structured finance, the analysts were responsible for both 

producing ratings and developing and maintaining ratings criteria. 

Balancing these two missions was a significant issue in the residential ratings group where revenues grew tenfold between 1995 

and 2005, and rating volumes grew five- or six-fold without similar 

increases in staff. Rating production was achieved at the expense 

of maintaining criteria quality. 

Adequate staffing was not the only challenge faced in trying to 

maintain the quality of the rating process. The accuracy of the predictive models used to evaluate risk was also critical to the quality 

of the ratings. The version of LEVELS model developed in 1996 

was based on a data set of approximately 250,000 loans. It was, I 

believe, the best model then used by a rating agency. As new models were programmed and tested, analysts continued to collect larger data sets for the next versions of the model. In late 2002 or early 

2003, another version of the model was introduced based on approximately 650,000 loans. At the same time, a data set of approximately 2.8 million loans was collected for use in developing the 

next version of the model. By early 2004, preliminary analysis of 

this more inclusive data set and the resulting econometric equation 

was completed. That analysis suggested that the model in use was 

underestimating the risk of some Alt–A and subprime products. In 

spite of this research, the development of this model was postponed 

due to a lack of staff and IT resources. Adjustments to the model 

used in 2004, with the identified problems, were not made until 

March 2005. To my knowledge, this version of the model based on 

the 2.8 million loan data set was never implemented. 

The final condition contributing to the failure of the rating agencies was the separation of the initial ratings process from the subsequent surveillance of ratings performance. While the rating process utilized ever improving models, surveillance operated under 

their own criteria. At S&P, the manager of surveillance refused to 

use the ratings model in reviewing the performance of outstanding 

bonds. In fact, the resistance to ‘‘re-rate’’ bonds with each new 

model came from upper management. The concern was that ‘‘re-rating’’ outstanding deals with new information would significantly increase rating volatility and possibly result in lost revenue. By 2005, 

when adjustments were made to the model, it should have been intuitively obvious that some bonds rated in 2004 did not provide the 

necessary protection to support the assigned ratings. 

In conclusion, it is my opinion that if S&P had vigorously pushed 

to implement the version of the model based on the 2.8 million loan 

data set in late 2004 or early 2005, the economics of deals incorporating the lowest quality subprime and Alt–A loans would have 

disappeared. In addition, the riskiest transactions submitted for 

ratings in 2005, 2006, and 2007 would likewise have been assigned 

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1The prepared statement of Mr. Michalek appears in the Appendix on page 119. 

lance department had ‘‘re-rated’’ existing deals each time ratings 

criteria were adjusted, transactions would have been put on Credit 

Watch or been downgraded in 2005 which would certainly have 

sent an early warning to investors and tempered their demand for 

similar bonds. 

This concludes my opening comments. 

Senator LEVIN. Thank you very much. Mr. Michalek. 

TESTIMONY OF RICHARD MICHALEK,1 FORMER VICE PRESIDENT AND SENIOR CREDIT OFFICER, STRUCTURED DERIVATIVE PRODUCTS GROUP, MOODY’S INVESTORS SERVICES 

Mr. MICHALEK. Mr. Chairman and Senator Kaufman, my name 

is Richard Michalek. I am a former employee of Moody’s Investors 

Service, a subsidiary of Moody’s Corporation. I joined the Structured Derivative Products Group at Moody’s in June 1999, and my 

position was eliminated in December 2007. At the end of my tenure 

at Moody’s, I held the title of Vice President and Senior Credit Officer. 

My general responsibilities included performing legal analysis on 

the structure and documentation of complex structured finance 

transactions in order to assign a rating to that transaction and to 

assist in the development of, and refinement to, rating practices, 

policies, and methodologies used by the group. My regular responsibilities included participating in rating committees within the 

group, and on request for other groups at Moody’s; consulting on 

legal matters for other groups in the New York, London, and Asian 

offices of Moody’s when requested; and speaking at industry conferences on a wide variety of legal and structural issues. I prepared 

and published the group’s quarterly and annual review and survey 

of activity. I assisted with the legal portion of semi-annual training 

sessions for new hires in the Structured Finance Department. 

During my last year at Moody’s, my primary responsibilities 

were split between serving as the senior legal analyst on the team 

responsible for developing, refining, and implementing the methodology for assigning ratings to highly complex credit derivative product companies and being the project leader responsible for developing a methodology for rating collateral managers. 

Immediately prior to joining Moody’s, I was a securitization consultant advising the New Zealand law firm of Chapman Tripp, and 

prior to that I was an associate lawyer in the New York office of 

the law firm Skadden Arps. I am admitted to practice law in New 

York State and was admitted to the bar as a solicitor in Wellington, New Zealand. I have a JD/MBA from Columbia University 

Law School and Columbia University Graduate School of Business. 

My testimony today is based on and primarily limited to my experience working in the Structured Derivative Products Group 

within Moody’s Investors Service, and while I had the opportunity 

to interact with several other groups within Moody’s, I do not profess any particular expertise or advanced knowledge of the methodologies or practices employed in those groups. My testimony 

today is also not being delivered with the intention to bring harm 

to any individual or to stand in judgment of individual behavior. 


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On the contrary, as I hope my oral remarks and written statement 

will illustrate, I believe that any imperfections, flaws, and failures 

observed or identified in the credit rating process of structured derivative products are neither surprising nor unexpected in light of 

the framework of incentives presented to the competent and otherwise rational people comprising the credit rating agencies. 

Credit rating agencies serve the important function of providing 

buyers and sellers of credit—that is, investors in and issuers of a 

promise to pay—an independent measure of the risk presented. In 

theory, these agents are independent, and because of repeat experience and a rationalization of costs, they should be able to provide 

this measure of risk at a lower cost than would otherwise be faced 

if the buyers or sellers produced the analysis themselves. 

My experience as an analyst, however, in the Derivatives Group 

and as a resource in the Derivatives Group for other groups in 

Moody’s for legal issues provides what I hope would be a useful 

perspective with respect to a couple of questions the members 

might like to ask. 

I know one question that is being asked: Just how independent 

are these agencies, particularly within an ‘‘issuer pays’’ framework? 

Another question that is and should be asked is: What consequences do rating agencies suffer under the current or any proposed framework when these measures of risk either fail to perform as reasonably expected or which can be shown to have lacked 

a level of care commensurate with the risk of harm that may 

foreseeably befall the user who relies on such measures? 

As for that first question, in my view, the independence of the 

Derivatives Group changed dramatically during my tenure. The 

willingness to decline to rate or to just say no to proposed transactions steadily diminished over time. That unwillingness to say no 

grew in parallel with the company’s share price and the proportion 

of total firm revenues represented by structured finance transactions. The apparent loss of bargaining power by the rating agencies in general and of the group in particular was coincident with 

the steady drive towards commoditization of the instruments we 

were rating. 

As our customers, principally the investment banks, produced 

more and more product for yield-hungry investors and as the quality distinction as between the different rating agencies lost some of 

its importance, the threat of losing business to a competitor rating 

agency, even if not realized, absolutely tilted the balance away 

from the independent arbiter of risk towards a captive facilitator 

of risk transfer. 

The second question—in essence, what price is paid or should be 

paid if a rating agency gets it wrong?—is in my view asking a 

handful of more fundamental questions. Who should bear the risk 

of getting it wrong, particularly when it is within reach to either 

not get it wrong or to choose not to rate? If we accept that the ratings are the rating agency products, should all the ratings issued 

by a rating agency be entitled equally to the same defenses for 

product liability? I am of the opinion that much more could have 

and should have been done to improve processes and procedures, 

but I am not so naive as to fail to appreciate that in the extremely 

competitive environment of hyper growth where the message from 


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1The prepared statement of Mr. Kolchinsky appears in the Appendix on page 140. 

management was not, ‘‘Just say no’’ but, instead, ‘‘Must say yes,’’ 

any available resource had to be spent on remedial corrections. Installing improvements were left for the someday pile. 

I am in the camp that believes that, to some degree, ratings provide an important public good. I also believe that some ratings, in 

light of the public good they provide, deserve some measure of protection from liability and opportunistic claims of negligence. However, to the extent that agencies are to remain wholly private entities understandably concerned with market share and net profits, 

a distinction based on the extent of the public good provided might 

be made with respect to the products being rated. Where some 

question can reasonably be raised as to the extent of the public 

benefit from rating one or more of the highly complex or novel instruments, the liability for getting it wrong might be more fairly 

assigned to the private parties involved. 

I am confident that if questions of negligence were not easily dismissed by protestations of free speech opinion, at least for that subset of ratings on products where the benefit of the rating falls primarily to the private parties involved, the agencies would redirect 

some of their extraordinary profit margins into resources and research and would once again have an incentive to just say no. 

That concludes my oral remarks. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Mr. Michalek. Mr. Kolchinsky. 

TESTIMONY OF ERIC KOLCHINSKY,1 FORMER TEAM MANAGING DIRECTOR, STRUCTURED DERIVATIVE PRODUCTS 

GROUP, MOODY’S INVESTORS SERVICE 

Mr. KOLCHINSKY. Thank you very much. Good morning. I would 

like to thank Chairman Levin and the Subcommittee for holding 

this hearing on the role of the rating agencies in the financial crisis. 

My name is Eric Kolchinsky, and during the majority of 2007, I 

was the Managing Director in charge of the business line which 

rated subprime-backed CDOs at Moody’s Investors Service. More 

recently, I was suspended by Moody’s after warning the compliance 

group regarding what I believed to be a violation of securities laws 

within the rating agency. 

In my opinion, the cause of the financial crisis lies primarily with 

the misaligned incentives in the financial system. Individuals 

across the financial food chain, from the mortgage broker to the 

CDO banker, were compensated based on quantity rather than 

quality. The situation was no different at the rating agencies. 

It is my firm belief that the vast majority of the analysts at 

Moody’s are honest individuals who try hard to do their jobs. However, the incentives in the market for rating agency services favored, and still favor, short-term profit over credit quality and 

quantity over quality. 

At Moody’s, the source of this conflict was the quest for market 

share. Managers of rating groups were expected by their supervisors to build, or at least maintain, market share. It was an 


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unspoken understanding that loss of market share would cause a 

manager to lose his or her job. 

Senior management would periodically distribute emails detailing their departments’ market share. These emails were limited to 

managing directors only. Even if the market share dropped by a 

few percentage points, managers would be expected to justify 

‘‘missing’’ the deals which were not rated. Colleagues have described enormous pressure when their market shares dipped. 

While, to my knowledge, senior management never explicitly 

forced the lowering of credit standards, it was one easy way for a 

managing director to regain market share. I do not believe that 

this was done in a deliberate manner. Instead, during the bubble 

years, it was quite easy to rationalize changes in methodology since 

the nominal performance of the collateral was often quite exceptional. Easier still was avoiding asking whether the collateral 

standards had declined or whether some of the parties had ulterior 

motives in closing the transaction. 

I began to receive these emails when I was promoted to managing director. They would list all the deals in the market for the 

relevant period and the amounts rated by Moody’s, S&P, and Fitch. 

I believe that my 2007 dismissal from the rating agency was a 

consequence of placing credit quality above market share. I was a 

managing director in the derivatives group, which was responsible 

for rating CDOs. CDOs were an extremely lucrative area for 

Moody’s: In the first two quarters of 2007, the group generated 

over $200 million of revenue. This amount accounted for approximately one-fifth of the total revenue of the entire rating agency. 

However, trouble for the securitization was already brewing. In 

early 2007, New Century, a major subprime lender, imploded. During the course of the year, the prices of synthetic subprime bonds 

precipitously declined. The end of this initial phase of the crisis 

was heralded by the fall of two Bear Stearns hedge funds which 

heavily invested in CDOs. The resulting price dislocation sent 

bankers hurrying to finish CDOs already in progress and to clean 

up their balance sheets. 

In September 2007, I was told that the ratings of the 2006 vintage of subprime bonds were about to be downgraded severely. 

While the understaffed RMBS group needed time to determine the 

new ratings, I left the meeting with the knowledge that the then 

current ratings were wrong and no longer reflected the best opinion 

of the rating agency. 

This information was crucial for the few CDOs in my pipeline, 

which were being aggressively pushed by bankers. If the underlying ratings were wrong, the ratings on these CDOs would be 

wrong, also. I believed that to assign new ratings based on assumptions which I knew to be wrong would constitute securities fraud. 

I immediately notified my manager and proposed a solution to the 

problem. 

My manager declined to do anything about the potential fraud, 

so I raised the issue to a more senior manager. As a result of my 

intervention, a procedure for lowering subprime bond ratings going 

into CDOs was announced on September 21, 2007. I believe this action saved Moody’s from committing securities fraud. 


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1The prepared statement of Mr. Cifuentes with attachments appears in the Appendix on page 

144. 

Just about a month later, in mid-October, another periodic market share email was sent to the managing directors in my group. 

Along with the email, our business manager noted that our market 

share dropped from 98 percent plus to 94 percent in the third quarter. My manager immediately replied to the email and demanded 

an accounting of the missing deals. 

This was the most disturbing email I had ever received in my 

professional career. A few days before, Moody’s had downgraded 

over $33 billion in subprime bonds. At the time, this was the largest ever single downgrade at Moody’s. As a direct result of the October 2007 additional downgrades, over $570 billion of ABS CDOs 

would be downgraded through the end of 2008. 

Despite the massive manifest errors in the ratings assigned to 

structured finance securities and the market implosion we were 

witnessing, it appeared to me that my manager was more concerned about losing a few points of market share than about violating the law. 

In late October, less than a month after that email and less than 

2 months after I intervened, my manager asked me to leave the 

group. I was given a smaller position with less responsibility and 

less pay in a different group. 

While Moody’s has acknowledged that the rating situation in 

September 2007 constituted a ‘‘problem,’’ they failed to act to prevent a nearly identical situation in 2009 in connection with a transaction called Nine Grade Funding. Instead of following some common-sense steps to prevent a violation of the law, Moody’s management chose to suspend me after I pointed out the breach. 

Recent rating activity indicates that market participants still 

prefer the most aggressive ratings. Rating firms which have taken 

conservative positions have seen their market shares tumble. We 

will no doubt see the results of this lesson when the regulatory 

spotlight is turned off. Credit standards will once again plunge as 

rating agencies race to build their market share. 

The only way to prevent this from occurring is to recognize that 

the function which the rating agencies perform is a quasi-regulatory one, much like accountants. A single set of public standards 

needs to be implemented, to be used for regulatory purposes only. 

This will allow rating agencies to compete for clients without being 

forced to lower credit standards. 

Thank you very much. 

Senator LEVIN. Thank you very much, Mr. Kolchinsky, for that 

testimony. Dr. Cifuentes. 

TESTIMONY OF ARTURO CIFUENTES, PH.D.,1 FORMER 

MOODY’S SENIOR VICE PRESIDENT, CURRENT DIRECTOR, 

FINANCE CENTER, UNIVERSITY OF CHILE, SANTIAGO, CHILE 

Mr. CIFUENTES. Thank you, Mr. Chairman, thank you, Senator 

Kaufman, for the invitation to be here in this hearing. 

My name is Arturo Cifuentes, and I am a professor at the University of Chile. I recently moved back to Chile after living in the 


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United States for 30 years. I spent probably the last 15 years working in finance. 

I worked at Moody’s—I have to say that—from 1996 until the 

end of 1999 when ratings really mattered and AAA meant something. 

This is the second time I am testifying before the Senate. I testified 2 years ago, and I made some observations regarding the problem at hand and some suggestions that I thought could be implemented, and I have articulated, I believe, in my testimony today 

all the relevant points that I wanted to make. So I am not going 

to read anything. I am just going to make three points which I believe are relevant in the context of what we are talking about here. 

The first observation that I would like to make is the following: 

Moody’s and S&P are two different companies. They give ratings. 

A rating is basically nothing but an opinion about the credit risk 

of a security. Moody’s gives ratings based on expected loss. S&P 

gives ratings based on probability of default. I do not want to go 

into the technical matters of what that means, but believe me, they 

are two different things. And they both profess to give ratings 

based on different benchmarks, different standards, different models, different approaches. They are two different companies in different buildings, different people. 

If you take a look, even a casual look, at the ratings given by 

Moody’s and S&P, there is a high degree of agreement between the 

ratings given by these two companies, which makes you wonder 

whether the ratings are really independent. That is something 

probably I think that raises some issues and should be investigated 

in more detail. There are certain mathematical methods actually to 

do that in a careful fashion, but you become very suspicious if you 

see such a degree of agreement between AAAs given by the two 

rating agencies. Considering the approaches, they should be a little 

bit different, so you wonder are these two companies dancing independently or is this carefully calibrated footwork to make sure 

credit ratings are aligning with market share. That is something 

that I think is a little bit concerning. 

The other issue that I would like to address here today is something that is more just applicable to the subprime market. The rating agencies have said on many occasions that the ratings they 

gave to transactions involving subprime loans performed so badly 

because they rely on data provided by the bankers and the data 

was not good. So allegedly they were not at fault because they used 

information that they did not have the opportunity to verify and it 

turns out to be wrong. 

I do not believe that is a reasonable explanation. For one thing, 

that was not the case when I worked at Moody’s. We always 

checked everything that the bankers told us. Whenever we are 

looking at the securitization for the first time, we look in a certain 

amount of detail to make sure the data presented to us actually 

was meaningful and accurate. 

If that were the case, it seems to me as a market participant that 

if the ratings were given on information that you did not verify, it 

seems to me that they should come up with a warning, something 

along the lines that, ‘‘We are giving a rating based on information 


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1See Exhibit No. 94b, which appears in the Appendix on page 599. 

2See Exhibit No. 94n, which appears in the Appendix on page 644. 

that we believe is true but we have not checked,’’ or something like 

that. I think that would have been a reasonable thing to do. 

And, finally, the third point that I would like to make, because 

this is a very serious problem, is the situation where we are right 

now, what we really—Senator Kaufman was talking about democracy and capital markets. I believe the situation we have right now 

is really bad because what we have right now, it is really a marriage made in hell. You have a situation in which nobody believes 

in the ratings, and at the same time, the ratings are part of the 

regulatory framework. So nobody believes in these. Still, you have 

played by the rules. 

Now, I cannot tell you how critical that is because the situation 

right now is that the securitization market is paralyzed, the ABC 

commercial paper market is more or less paralyzed, or it is a shadow of what it used to be. It is about one-third of the size. And that 

has significant effects on the fixed-income market. 

There is a perception—and I am going to stop here—that this 

market is not regulated. Actually, I would say that this is probably 

the most regulated market in the world. It is just that it is regulated by the rating agencies, and it did not work out that well. 

So I think I am going to stop here, and then I am going to be 

happy to answer any questions that you might have. Thank you 

very much. 

Senator LEVIN. Thank you very much, Dr. Cifuentes. 

What we will do is have 20-minute rounds. We can have more 

than one round if we need them. 

If you all would take a look in the exhibit book at Exhibit 94b,1

this is a CDO known as Vertical ABS CDO 2007–1. S&P analysts 

in 2007 complained about how the Vertical’s issuer, UBS, was not 

cooperating with them, and the deal was unlikely to perform. In a 

2007 email, the one that you are looking at there, Exhibit 94b, one 

analyst for S&P wrote, ‘‘Vertical is politically closely tied to B of 

A—and is mostly a marketing shop—helping to take risk off books 

of BoA. Don’t see why we have to tolerate lack of cooperation. 

Deals likely not to perform.’’ 

Now, despite that judgment that the CDO was unlikely to perform, S&P rated it. Several months after that deal was rated, the 

loans began to show delinquencies, and a little later on, S&P and 

Moody’s downgraded it. Those securities, by the way, are now 

below investment grade. They are in junk status. 

One of the purchasers of the Vertical securities is a hedge fund 

called Pursuit Partners. They sued S&P, Moody’s, and UBS over 

the quick demise of the security. As I mentioned before, S&P and 

Moody’s annuities were dropped from the lawsuit because of the 

lack of the ability under our current law to sue the rating agencies. 

But the court ordered UBS to set aside some funds to pay a possible award to that investor. 

Now, the investor had also uncovered an internal email at UBS 

in which a banker wrote, ‘‘Sold some more crap to Pursuit,’’ referring to the Vertical securities which were then rated as investment 

grade. That is Exhibit 94n,2 by the way. 


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1See Exhibit No. 94e, which appears in the Appendix on page 614. 

So, first, Mr. Raiter, let me ask you: Is it common for an S&P 

analyst to rate a deal even though the analyst thought, as we 

looked at Exhibit 94b, that the deal was ‘‘not likely to perform’’? 

Mr. RAITER. Senator, I have to say that I was not in CDOs and 

really do not know how they did things down there. On the residential side, at the time that I was involved, it was not unusual 

to turn down deals if we did not think they were going to perform 

or if they did not meet our criteria. But as I think as has been 

pointed out in your opening statements, things got dramatically 

more haywire after 2004 and 2005. But I honestly could not tell 

you what they did in CDOs. 

Senator LEVIN. All right. But where you worked, if something 

was expected not to perform, you would not be rating it, I assume, 

as being expected to perform? 

Mr. RAITER. No, sir, we would not. As I say, there were occasions 

where we had some real concerns about collateral, and we just 

would put such high levels on the transaction, it was not economic 

for them to do it and we would not rate it. In the late 1990s, Prudential Mortgage changed their waterfall structure, which did not 

meet our criteria, and for a number of years we would not rate any 

of their deals because they did not meet the standards that we had 

set. 

Senator LEVIN. OK. Now, Mr. Kolchinsky, you have had years of 

experience, I think, with CDOs. Should a CDO which is expected 

not to perform be given a AAA rating? 

Mr. KOLCHINSKY. Absolutely not. If the analyst was convinced 

that the deal would not perform, that deal should not be rated. 

Senator LEVIN. Take a look, if you would, Mr. Kolchinsky, at Exhibit 94e.1 Exhibit 94e shows that some of the assets that were included in the CDO had already been downgraded at the time that 

they were included. Do you see that downgrade? 

Mr. KOLCHINSKY. Yes, I do. 

Senator LEVIN. Both on pages 1 and 2. A lot more, actually, on 

page 2 than there was on page 1. But, anyway, there are a lot of 

those that had already been downgraded at the time they were included so they were not performing as expected. 

Now, if a downgraded asset is included in a CDO, is that something that an analyst would note? 

Mr. KOLCHINSKY. We had rules that if an asset was on watch, 

it would be taken down a few notches. Once an asset was downgraded, under these rules it would be used at that rating and no 

more or no less unless it was on watch. 

Senator LEVIN. And would that be a warning sign about the 

quality of the assets in the CDO? 

Mr. KOLCHINSKY. It would have been a qualitative warning. 

Quantitatively, I do not think that left an analyst, under the then 

prevailing rules, much room because at that point the RMBS 

Group has said this is our new view and this is our best view. 

Senator LEVIN. And should it affect the credit analysis? 

Mr. KOLCHINSKY. Oh, absolutely. With hindsight, I think this is 

something I tried to do later as we saw that once you take the path 

down to downgrade, that is not likely to stop. And so securities, we 


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1See Exhibit No. 93b, which appears in the Appendix on page 589. 

try to implement something where the securities that have been 

downgraded already but not currently on watch be stressed more 

severely. 

Senator LEVIN. It should affect the analysis, as you indicate, but 

it did not affect the analysis here. The S&P analyst there, Mr. 

Halprin, said in his email that Bank of America was using the 

CDO to take risk off its books. Now, Vertical is a company that was 

partly owned by Bank of America and was run by several former 

Bank of America employees. And if an analyst thinks that what is 

going on with a CDO is taking bad assets off a company’s books, 

should that affect the rating process? 

Mr. KOLCHINSKY. I think so. 

Senator LEVIN. Now let me ask all the panelists, how long is it 

expected that a AAA rating should hold? 

Mr. RAITER. It should hold for the life of the transaction and the 

life of the tranche, as you pointed out, Senator. The waterfall typically pays the higher-rated bonds off first, and as they pay down, 

then the bonds that are underneath it start receiving the flows. 

But it should last the life of the transaction, for mortgage-backed, 

7 or 8 years. 

Senator LEVIN. Would you all agree with that? 

Mr. KOLCHINSKY. Yes. 

Mr. MICHALEK. I wouldn’t. 

Senator LEVIN. So, in this case, these ratings were downgraded 

within a year and are now below investment grade. These are junk. 

Mr. MICHALEK. Senator, if I could respond. 

Senator LEVIN. Mr. Michalek, I am sorry. You did not agree. 

Mr. MICHALEK. No, I did not. 

I think that we are touching on something that you are likely to 

hear later in the day, that, in fact, the common perception of what 

a AAA rating is and means is not necessarily what the definition 

of a AAA rating is. This is something of a legal distinction, but at 

the same time, I think it is very important that this is not lost on 

the Subcommittee. 

In fact, there is published by Moody’s the migration rates and 

history of the different ratings that are assigned, and those migration rates represent an average migration for a particular rating. 

But it is simply an average from a population of which there are 

tails at either end. Some AAAs never get downgraded, and there 

are others that are downgraded, unfortunately, quite quickly. And 

I do think that there is an expectation in the market and there is 

a proper expectation that AAAs are not going to be issued on Monday and on Friday downgraded to anything else. 

That debate as to whether or not there should be or is a necessary element of stability in the rating, at least at Moody’s, was 

one that was ongoing. 

Senator LEVIN. OK, thank you. Let us take a look at another 

failed rating, this time involving mortgages issued by Fremont. 

Take a look at Exhibit 93b.1 In January 2007, S&P was asked to 

rate an RMBS with subprime loans issued by Fremont Investment, 

a subprime lender known for poor-quality loans. At that time an 

S&P ratings analyst sent an email to a supervisor saying the folVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000036 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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1See Exhibit No. 93c, which appears in the Appendix on page 590. 

2See Exhibit No. 93d, which appears in the Appendix on page 592. 

lowing: ‘‘I have a Goldman deal with subprime Fremont collateral. 

Since Fremont collateral has been performing not so good, is there 

anything special I should be aware of?’’ 

Now, one of the supervisor’s response was, ‘‘No, we don’t treat 

their collateral any differently.’’ And the other one wrote back, in 

Exhibit 93c,1 that as long as we had current FICO scores for the 

borrowers, the analyst was ‘‘good to go.’’ 

So we got S&P employees now that know there is a problem with 

Fremont loans, but treated those loans like any other. 

In Exhibit 93d,2 there is an email in which S&P analysts were 

circulating an article about—and this is January 29—how Fremont 

had stopped using 8,000 brokers because of loans with high delinquency—with some of the highest delinquency rates in the industry 

coming from those brokers. 

Now, in March, a couple months later, Fremont announced in an 

8–K filing that the court of appeals had found sufficient evidence 

in a lawsuit filed by the California Insurance Commissioner that 

the company, among other things, was ‘‘marketing and extending 

adjustable-rate mortgage products to subprime borrowers in an unsafe and unsound manner that greatly increases the risk that borrowers will default on the loans or otherwise cause losses.’’ And the 

suit then could proceed against the company. Just a few days later, 

Fremont entered into a publicly available cease-and-desist order 

with the FDIC regarding fraud and lax underwriting standards. 

Despite that information, Fremont RMBS securities were rated 

by both S&P and Moody’s in late February and early March. Before 

the ratings were done, they knew of those facts which I just described. By the end of the year in 2007, both companies began substantially downgrading the Fremont RMBS securities. 

Does either S&P or Moody’s take into account an issuer’s reputation for issuing either good loans or bad loans and incorporate that 

into their credit analyst? Mr. Raiter. 

Mr. RAITER. The answer is yes, they do. At the time that this occurred, the policy had been in the past that when information was 

provided to the analytical staff by investors or other originators, 

they would look into the matter, and if, in fact, it was justified, it 

would have resulted in a visit to them and a review of their practices and procedures. It could ultimately have resulted in their 

deals being put on Credit Watch or, in fact, being held up for ratings until the information could be worked out. 

At this time, in fairness to what was going on, there were rumors 

rampant about the quality of appraisals and the quality of underwriting standards that could have been quite overwhelming for the 

staff to try and track them down. But it routinely would have been 

investigated—— 

Senator LEVIN. Should have been. 

Mr. RAITER [continuing]. And factored in. It should have been. 

Senator LEVIN. It should have been. So when the analyst said no 

special measures with Fremont, that was not what was supposed 

to happen. 


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Mr. RAITER. It was the manager’s responsibility to say this is a 

problem, we are going to get to the bottom of it, because the analysts took their marching orders from the managers that were in 

control of the criteria and the process. 

Senator LEVIN. So, again, when they said in that email no special 

measures, there should have been special measures taken? 

Mr. RAITER. There should have been, yes, sir. 

Senator LEVIN. Mr. Michalek. 

Mr. MICHALEK. I do not know if I feel competent to comment too 

much on how the RMBS team would have responded to those particular allegations. I know that with respect to collateral managers, 

and at the CDO level, if there was an issue that was raised regarding the reliability of the origination that the collateral manager 

was involved with, we might explore it and would definitely send 

a team to the collateral manager to do what we call an ops review 

to evaluate those procedures. The information that was obtained 

from those reviews would be used in our analysis in rating the 

transaction. But as to the underlying collateral, I am not competent 

to comment on. 

Senator LEVIN. OK. Mr. Kolchinsky, should there have been 

measures taken in those circumstances? 

Mr. KOLCHINSKY. I think so. As Mr. Michalek said, I am not competent on what occurred in the RMBS group, but had this information come on the CDO side, we certainly would have looked into it, 

or should have looked into it. 

I would also say I was not involved in 2007, as this information 

went through with the folks who rated subprime directly. But there 

was almost a feeling when dealing with them that there was a ‘‘see 

no evil, hear no evil’’ sort of attitude, and partly I think it is because people who had done these deals, rated these deals, did not 

want to believe what was going on, partly profit motivated, partly 

because they were part of this market, and it just should not be 

happening. 

Senator LEVIN. Part of that culture. 

Mr. KOLCHINSKY. Part of that culture. Closed eyes. 

Senator LEVIN. Dr. Cifuentes. 

Mr. CIFUENTES. I can comment on what happened at the CDO 

group when I worked at Moody’s. On many occasions, for example, 

we were presented with transactions that either did not make any 

sense or that had a particular peculiarity that made us nervous. 

The response was either no, you cannot do that, or the rating is 

going to be very low. It is not going to be a AAA; it is going to be 

way below. Or we took into consideration when analyzing the 

transaction or when modeling all the peculiarities that were applicable to that particular transaction. So that is the way it was done 

at the CDO group. I did not work mortgages, but—— 

Senator LEVIN. When you were there, that is the way it was handled? 

Mr. CIFUENTES. Yes. I remember many situations, as I said, in 

which we encountered a transaction, for example, that was done for 

the first time. We did not have enough data, for instance, so we 

had to make conservative estimates about certain things, and that 

is the way we did it. 


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1See Exhibit No. 93a, which appears in the Appendix on page 587. 

2See Exhibit No. 95a, which appears in the Appendix on page 646. 

3See Exhibit No. 95b, which appears in the Appendix on page 647. 

Senator LEVIN. And that is the way you believe it should have 

been done? 

Mr. CIFUENTES. I believe so, because I can give you an example. 

For example, at Moody’s I rated the first emerging market CDO 

that was done. That was in 1996, and we rated emerging market 

CDOs probably between 10 and 15 deals in that time frame. One 

of the problems with emerging markets was we did not have 

enough data. So the way we handled that—we were conscious of 

that—we made conservative assumptions regarding certain pieces 

of information that we did not have, and we did something—at the 

risk of sounding too technical, but I think you are talking about a 

trillion dollar problem, you better get the technical thing right. So 

we did something called stability analysis to see how the impact of 

uncertainty in the data would affect the ratings, and I have to say 

that all those emerging market deals did very well, actually. 

Senator LEVIN. Take a look at 93a.1 This says volumes about 

Fremont and what was known. This is a Moody’s email, December 

2006. They were talking about delinquency rates for issuers. If you 

look at page 2, ‘‘Here is a chart of the top 10 issuers’’ that have 

high delinquency rates, and then on the bottom of the next email, 

it says, ‘‘Holy cow - is this data correct? I just graphed it and Fremont is such an outlier!!’’ In other words, they are one of the worst 

when it comes to delinquency rates. More evidence about Fremont, 

by the way, about as bad as it gets. They had those articles about 

the 8,000 brokers and the other information that I mentioned. 

But just in terms of the deals, I wanted to talk about an email, 

Exhibit 95a.2 This was an email from July 2007, in which an investment banker described a deal called Delphinus. This was rated 

AAA by both S&P and Moody’s. Exhibit 95a described Delphinus 

as having a lot of cushion, they needed a lot of cushion to protect 

against losses. Despite that cushion, by the way, Delphinus was 

downgraded 6 months after being rated. That may not be Monday 

to Friday, Mr. Michalek, but it is not the way it is supposed to be, 

right? 

Mr. MICHALEK. That is correct. It is not. 

Senator LEVIN. Now look at Exhibit 95b.3 This is an S&P email 

chain from August 2007. An S&P analyst wrote here regarding 

Delphinus, ‘‘[I]t appears that the closing date portfolio they gave us 

for analysis and the effective date portfolio . . . were not the same. 

It appears the 25ish assets’’—and we are looking at, again, Exhibit 

95b—‘‘that they included in our closing date portfolio that were 

dummies were replaced in less than 24 hours with assets that 

would have been notched and made the portfolio worse.’’ 

Now, if I read this right, the CDO had given S&P dummy assets 

that S&P used to come up with its rating, and then at the last 

minute replaced those dummies with new assets less than 24 hours 

before the closing, and the new assets, if I read this correctly, made 

the portfolio worse. And if that had been acted on, the rating would 

have been worse 

Mr. Raiter, is that a correct reading of that email, would you say, 

the way you read it, too? 


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Mr. RAITER. These are relating to CDO analyses, and CDO, and 

it suggests that they pulled—they put dummy deals in the original 

run, and then they substituted them with loans or CDO credits 

that did not meet the standards that the original run was completing, or completed on or contemplated, and it looks like a bait 

and switch and that it did not meet the criteria. But I do not know 

who addressed it because if I follow the email stream, they were 

waiting for a manager to get back to them. 

Senator LEVIN. Yes. I tell you, these emails are, I think, just devastating as to the kind of culture that was going on here. It is incredible that you could have this kind of dummy assets being put 

into a CDO, then substituted at the last minute with even poorer 

assets. 

Mr. RAITER. Well, I would like to point out, if I could, Senator, 

there were a lot of very good analysts that were writing these 

memos and asking for guidance, and the guidance was not forthcoming from the top. 

Senator LEVIN. I could not agree with you more. But that is the 

culture that existed here, and I am going to now turn this over to 

Senator Kaufman. 

Senator KAUFMAN. Thank you, Mr. Chairman. 

To follow up on that question, in your opening remarks, you attributed this to bad incentives, which clearly has gone on, the incentives were wrong, quality was gone, quantity, competition. Mr. 

Raiter, you mentioned the SEC oversight. How much of this was 

just outright fraud? I understand this about the business, and I am 

going to get into this a little bit. But it seems to me the things that 

were going on here, because of the incentives, because of the lack 

of oversight, people were actually doing stuff that they knew absolutely totally was wrong. Mr. Raiter. 

Mr. RAITER. Well, it is clear from a lot of these emails people 

were making very poor calls in terms of the analytics. But whether 

that is fraud or not, it was wrong, it did not look good. They certainly would not want it to have the headline risk in the Wall 

Street Journal. But there was no one over there watching over 

them to tell them this is not the right thing to do. 

Senator KAUFMAN. No. I understand that, and I am very sympathetic to that. And if you heard any of the speeches I have given 

on the floor, I pretty much beat up on the regulators for what they 

did not do. But I spent a lot of time in business. I worked for corporations. There were always incentives of some kind to make the 

quarterly earnings, push the stuff out the door, do the rest of it. 

But when you have the incredible amount of—the chart that he put 

up there on the number of RMBSs that were rated AAA and ended 

up turning to junk, many of them you were going after. And maybe 

‘‘fraud’’ is too strong a word, but things that just are not common 

business practice no matter what the incentives are, no matter 

whether you are being regulated or not. 

Mr. RAITER. Well, they were not good business practices, and it 

is my opinion that there was a huge disconnect between management. Senior management thought that they were responsible for 

all these wonderful things and that the analysts were just the soldiers in the trenches doing what they were told. 


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Senator KAUFMAN. You talked about a disconnect, and I want to 

get into it, between the people doing the rating and the surveillance. But talk a little bit about—I have been in organizations, not 

just government organizations, private—where there is a disconnect, but a disconnect that this is a pretty incredible disconnect 

if you keep turning out products, and Mr. Michalek, I will get to 

the idea of what AAA really means or not. But you are turning out 

product because of the incentives, because of the regulators, because of the disconnect between management, all those things happen. But you are turning out product that is just really not good 

product, and how much of it is because of the emails, as Senator 

Levin said, where people just said, OK, and because of incentives, 

because of regulators, I am going to do something here and try to 

rearrange this thing. 

Mr. RAITER. Senator, if you have been in business, the choices 

that you face in a dilemma like this is you can quit. 

Senator KAUFMAN. Right. 

Mr. RAITER. If you have a family to support, that might be a little bit tenuous. And some of us chose to do just that. I retired because I got tired of the frustration. But a lot of the analysts that 

left tried to fight the good fight. Many of them have subsequently 

been laid off. 

Senator KAUFMAN. Right. 

Mr. RAITER. And when you bang your head against the management wall and ask for the money and give them presentations and 

show them the benefits of the higher-quality rating criteria and 

they come back and say, ‘‘But revenues will go down,’’ you are 

faced with just that choice. Either you continue to work there and 

fight, or you quit. 

Senator KAUFMAN. I am very sensitive to this, and I understand 

this. I have been there. But how much do you think the management really knew what was going on down in the trenches because 

of the pressures they were putting on the people down there in the 

trenches? Do you think they were oblivious to this, that they—— 

Mr. RAITER. You have Kathleen Corbet, the former President, on 

the docket for the third panel. 

Senator KAUFMAN. Right. 

Mr. RAITER. She could possibly shed some light. Budgeting and 

the whole process of making requests and sending them up the line 

was a mystery. We never sat down and were explained why we did 

not get things, why they would not make the changes recommended. They just did not respond. They did not communicate 

down, from the top down. 

Senator KAUFMAN. Right. Mr. Michalek. 

Mr. MICHALEK. I can tell you at Moody’s, while I was there, it 

was frequently the case that in a particularly sensitive issue, the 

information did travel upward. I was involved in one transaction 

where I was asked to consult with somebody in Public Finance. 

They had a ratings problem that was leading to litigation. And the 

general counsel for Moody’s was at the table. We were on conference calls together. We were talking to the client. We were trying to resolve this. 

Brian Clarkson—at the time, I think he was president of Moody’s 

Investors Service—was on the call, and this was for a relatively 


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1See Exhibit No. 95a, which appears in the Appendix on page 657. 

small matter. In terms of the total amount of issuance, it was probably a quarter of a billion dollars [$250 million]. It was not as large 

as one of our CDOs. 

So from that alone, I would infer that the information regarding 

some of the much larger conflicts and potential problems was definitely reaching upwards. 

Senator KAUFMAN. Mr. Kolchinsky. 

Mr. KOLCHINSKY. Thank you. First, before I answer your question, I want to quickly come to the defense of the analyst mentioned in Exhibit 95a.1 In fact, that analyst that was mentioned 

was extremely bright and the reason that she was not wanted on 

that deal is because she asked a lot of very good questions. I wanted to come to her defense. 

Senator KAUFMAN. Sure. No problem. 

Mr. KOLCHINSKY. Second of all, I do not believe in the cause of 

the crisis there was a lot of instances of outright fraud, legal fraud. 

There may have been some on the front end with the mortgage brokers in filing applications that were clearly fraudulent. But the 

way the system worked, you had a chain—it was almost like a 

game of telephone where you pass some information down the line, 

and everybody changes it just a little bit—not enough to jump over 

the fraud, but because the length of the chain from the mortgage 

broker to the originator to the aggregator to the CDO, by the time 

everybody takes a little cut, changes it a little bit, by the time you 

got to the end of the line, the information or the product was garbage. So that is why you have not seen a lot of cases of outright 

fraud because everybody pushed the envelope, clearly pushed the 

envelope. But because of everybody pushing the envelope, the end 

product was garbage. 

Senator KAUFMAN. Yes, but, I can see that in 1 day, I can see 

it 2 days, I can see it 5 days, I can see it a month, I can see it 

2 months, I can see it 3 months. I just find it—these are very 

smart people. I mean, when you look and see you are in the middle 

of a chain and you see what is happening, at some point you say, 

there is something really going on here. And maybe it is nonfeasance. It is not malfeasance. They are not doing it to be bad. They 

just do not go back and look to find out what they do not want to 

know, what actually happened. 

Mr. KOLCHINSKY. I think that is right. Yes, sir, I think if you 

were going to sort of talk about sins, it is sins of omission because 

of the market, because of the incentives. There was really no incentive to look, to look under the rocks. If the rocks kind of looked polished and nice, OK, we will pass it on. 

Senator KAUFMAN. This is the third hearing we have had, and 

this is kind of a common theme. No one knew what was happening. 

It just rings to me of other cases where no one knew what was happening. But people knew—these are not really dumb people. These 

are not people that just come in to work, sit in their cubicle, look 

at what they are doing, they are not reading the newspaper, they 

are not picking up the Wall Street Journal or Barron’s and reading 

about what is going on with the housing market or mortgagebacked securities or any of this kind of stuff. They are just coming 


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to work, doing their job, getting pushed, and have these incentives. 

As Mr. Raiter said, good people. And they are stuck. And I do not 

think it is the good people, frankly, in my experience, like the analyst you mentioned, that were the problem. I think this is a systemic problem here that was not—we talk about it in kind of surgical terms, like incentives and regulation and all that stuff, which 

are all absolutely totally on the mark. It was the incentives, and 

it was the regulatory environment, and it was a flawed business 

strategy, and it was competition, and it was quality over quantity. 

When you put all those things down, somebody in the middle of 

this thing would have to be totally, completely—they had to put together the big picture. Somebody had to say, look, we are putting 

incentives on here, we got this quantity problem, we got the competition problem, we are not having very much regulation and oversight. There is a potential here for something really bad to happen. 

Mr. Cifuentes. 

Mr. CIFUENTES. I think you bring up a good point, Senator. In 

fact, you referred to your experience in the private sector. The 

thing to keep in mind here is that this is a very peculiar sector in 

the private market. I mean, to be perfectly blunt, if you are in the 

private business and you do a lot of things wrong, eventually you 

go out of business. I mean, that might be evident. Arthur Andersen 

does not exist anymore, for example. 

In the rating business, because of some really flawed regulatory 

framework, there is no penalty for giving bad ratings. In fact, we 

are having this conversation 2 years after my first—and the rating 

agencies, they keep issuing ratings and they keep collecting fees for 

that. 

So, in my opinion, one of the problems is the regulatory framework. Today the barriers to entry into the credit rating business 

are tremendous. There was a law that was passed by Congress, the 

Rating Agency Act. If you want to start a new rating agency, you 

have to show that you have been in operation for 3 years giving 

ratings and collecting fees. Now, who is going to pay you for a 3- 

year period to give ratings that do not have any validity? 

So, in my opinion, that is something that needs to be changed 

because one of the problems we have right now, there is no penalty 

for getting out ratings that are unreliable. I mean, basically the 

rating agencies were giving a free gift, and you cannot blame them 

for that. I mean, they are taking advantage of a very unique opportunity to bring money in. 

Senator KAUFMAN. Mr. Michalek, I think you have got at the 

other key point in this whole discussion, especially on the hearing 

today, and that is that you want to make sure that the Subcommittee understands what AAA really means. 

Mr. MICHALEK. Correct. 

Senator KAUFMAN. And I think there is such an incredible disparity between what everyone reads AAA to be and what AAA 

means. 

Mr. MICHALEK. To the rating agencies, in the disclosure documents, I think there is a disparity—Senator Levin used the term 

‘‘safe,’’ and I do not think that ‘‘safe’’ is correct, as a description— 

it is definitely the commonly understood adjective that you would 

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ple—when this first debate first came up, there was a transaction 

that I was working on with an analyst that there was problematic—because of the particular assets that were in the pool—and 

they were not yet placed on negative Credit Watch, so quantitatively we could not take the haircut that we knew was going 

to be coming. And through some other measures, we were able to 

anticipate that there was going to be a likelihood that this would 

not hold its rating for a very long period of time. 

However, on the closing date, it did meet the published criteria. 

It did reach that particular quantitative number, and we could not 

say no—this was sort of at the beginning of the cultural change. 

We could not say it is a ‘‘different’’ AAA. 

Senator KAUFMAN. And, by the way, I am very sensitive to that. 

It is hard to give ratings to agencies. It is hard to figure out what 

is going to happen. And in cases like that, if what transpired after 

that had not happened, I would be sitting here as the most sympathetic man in the room to what you are saying. 

The question is at some point it went from that—which was a 

tough decision. And when you talk to the rating agencies or listen 

to what the rating agencies say, they still think it is like that. You 

just do not understand. We have these very difficult questions that 

we have to deal with. So AAA does not mean that it is going to 

be here forever, and AAA does not mean this and AAA does not 

mean that. 

Yes, AAA does not mean thousands of securities that are rated 

AAA that 2 years later are junk. So this is not a discussion—we 

are not having the first discussion, the discussion that I always 

learned about in business school, and also about what rating agencies are. I know what rating agencies are. And that is what they 

used to be. But when you are faced with a situation where because, 

again—because of not regulating the rating—so what is it that rating agencies are? AAA does not mean AAA. It does not mean AAA 

based on your very good definition of what it used to be. But AAA 

does not mean the same. So how do you deal with this, the fact 

that you had this systemic—is it fair to say a systemic problem? 

Mr. MICHALEK. I think so. 

Senator KAUFMAN. And how do you get at that so that specific 

problem—and we are going to have all kinds of new problems. We 

do it around here all the time. But how do you deal with that systemic problem? 

Mr. MICHALEK. In my opinion, I think that we would really have 

to begin with what we are disclosing. I personally believe that 

there are products that deserve a commonly understood rating, 

that the public can say this is safe, because the rating is saying 

that it is safe. And I think that for a large number of the highly 

complex structured products, it is a different ball game. And I 

think that to the extent that you are able to distinguish between 

those products that are clearly in the different ball game, then the 

caveat of buyer beware is more appropriately applied. But for that 

portion of the products that I think the enormous public good that 

comes from having an independent arbiter of risk apply a commonly understood and accepted measure of that risk, I think that 

is something that we should seek to preserve, and so that it would 

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able conversation that goes on with respect to the highly complex 

products, into what really should be beyond debate with respect to 

what is safe and what is definitely contributing to the public good. 

Senator KAUFMAN. And do you think you could do that? I mean, 

realizing that there would be some securities in the middle that 

would be—but having the idea that for what is commonly known 

as AAA corporate bonds you have one thing; for credit default swap 

you have something different. 

Mr. MICHALEK. I think that it would require an impetus from 

outside. Clearly, the rating agencies do not, as it has already been 

demonstrated, have an internal incentive given the way that they 

are structured to pursue market share and to pursue profits, to install that kind of change, at least not to be the first one to install 

that kind of change. 

I had the somewhat naive idea when I joined Moody’s that there 

was a particular quality that Moody’s was offering, and that was 

something that the company was going to seek to defend over time, 

and that effectively our brand meant something, and that I expected people to step in much earlier to say we are diluting our 

brand. And if we had this 96 or 98 percent market share, once our 

brand becomes absolutely equivalent to the other three, mathematically we are not going to stay there. 

Senator KAUFMAN. Mr. Michalek, you have just defined this 

whole thing. I mean, in my opinion, everybody just decided to go 

for the fastest possible money they could ever possibly make and 

not worry about the brand and not worry about anything. I think 

it goes to the whole thing where we—and we did not have this, as 

Mr. Raiter pointed out, and the big thing that was missing was the 

referees on the field. We just pulled the referees off the field not 

just in the rating agencies but with everybody else, and we said we 

do not need referees anymore. And I think just like in football, or 

here or anywhere else, just like why we need police on the beat, 

not because people are crooks, but because police should be on the 

beat because potentially they will become crooks if, in fact, the 

temptations are so great. 

Mr. Raiter, how do you think we deal with problems going down 

the road in terms of rating? 

Mr. RAITER. Well, I think you have to have some rules. Actually, 

you have to have some penalties for not doing the right thing, and 

there are none, and there are no measures of whether you are 

doing the right thing. 

Senator KAUFMAN. What would you define as not doing the right 

thing, for instance? 

Mr. RAITER. Well, I would say if you have developed a model in 

the house that shows that it is much better than anything you are 

running and it shows that you have been too optimistic with the 

ratings you have assigned, and you do not immediately start to use 

it and go back and re-rate the old deals so you can warn the investors that we have been wrong, then that is not doing the right 

thing. And I will point out from a cultural perspective, there were 

two mantras that we heard at Standard & Poor’s all the time after 

I joined, and I am sure they went on before that. One was a AAA 

is a AAA is a AAA, and it did not matter if it was a corporate, a 

municipal, or the new structured products. And they used the tranVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000045 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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1See Exhibit No. 5, which appears in the Appendix on page 258. 

sition studies to prove that by saying, look, here is the transition 

of a AAA corporate, what is the probability it might be downgraded? What is the probability it might go from AAA to default, 

as in Penn Central? There had never been a AAA mortgage-backed 

that had gone to default from AAA until this latest debacle. In the 

transition of AAA mortgage-backed’s compared to AAA corporates, 

it was much better. All right? So AAAs were all the same. 

The other thing that was heard constantly—and it was in one of 

these emails—if we change, everybody will think that we have been 

wrong. And that just put a real anchor on any new ideas quickly 

going through the process because they were afraid somebody 

would suggest that they had not been right before and they would 

have liability or they would lose some market share. That was not 

doing the right thing, and they do not have a referee or anyone to 

tell them when they have crossed that line. 

Senator KAUFMAN. Well, the other thing is, look, everybody— 

there is not a single thing that has been raised here this morning 

in terms of what the behavior was. As an elected official, you hate 

to change your position on anything because it admits that you did 

something wrong. I mean, everybody does—these are all common 

things. I think the fact that there are no penalties is key, and I 

would like to get at least a little bit of questions in the second 

round about grandfathering, and exactly what you said, why there 

was not more grandfathering with all the witnesses. 

So with that, I yield to the Chairman. 

Senator LEVIN. There is always going to be a debate on how to 

cure a system, but we know there are a lot of things that should 

not have happened that did happen, and we are going to debate 

those cures as to what the remedies are legislatively in the week 

coming up. 

But I want to go back to some of the things that it is pretty obvious to me were wrong, wrong at the time, and as complex as some 

of the remedies are, some of these issues are not complex at all. 

Market share should not be driving ratings. Would you all agree 

with that? 

[Witnesses nodding affirmatively.] 

Senator LEVIN. Let us take a look at what drove the ratings here. 

Let us look at some more evidence. Exhibit 5, an email dated 

March 23, 2005, between S&P employees that I think you worked 

with, Mr. Raiter. Here is Exhibit 5.1

‘‘When we first reviewed 6.0 results ‘a year ago’ we saw the subprime and Alt–A numbers going up and that was a major point of 

contention which led to all the model tweaking we’ve done since. 

Version 6.0 could’ve been released months ago and resources assigned elsewhere if we didn’t have to massage the sub-prime and 

Alt–A numbers to preserve market share.’’ 

Should those numbers be massaged to preserve market share? 

Does anyone believe that? Mr. Raiter. 

Mr. RAITER. No, sir. They should not have been massaged. I 

think I stated earlier that as the models were developed by our 

consultant and they were tested in-house to verify that they were 

accurate and that their predictiveness was an improvement over 


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the model that was currently running, the models were immediately put into force. We ran out of financing and funding in our 

budgets in 2003 to put this Version 6.0 model in place. But the preliminary analysis, as Dr. Frank Parisi suggested, was that we were 

not adequately rating the transactions. That model was delivered 

I believe in September 2006. They did an accuracy evaluation. It 

was determined to be accurate, better than what they were running, and the consultant was paid. But they also performed what 

was called an impact analysis on the ratings. We had never done 

that before, so I do not know where the order came to start doing 

impact analysis on the effectiveness new models had on market 

share. But it is apparent that is what happened. 

Senator LEVIN. And what was your reaction when you read that 

email? 

Mr. RAITER. I was pretty amazed. I mean, Frank Parisi was one 

of the Ph.D.s that worked on these models. He is very knowledgeable. He is one of the best analysts they have and very outspoken. 

Senator LEVIN. Were you bothered by it? 

Mr. RAITER. Certainly. 

Senator LEVIN. Mr. Michalek, should market share be preserved 

by massaging numbers? 

Mr. MICHALEK. No. 

Senator LEVIN. Is it troubling when you see that kind of an 

email? 

Mr. MICHALEK. It is troubling in the sense that it is one more 

piece of evidence of what I was observing while I was at Moody’s. 

One of the comments that might be somewhat illustrative of this 

is when I had some discussions with Brian Clarkson about the 

process, his perspective was, yes, we could effectively produce perfect ratings, but we would not be on the deals. And if we are not 

on the deals, then we are not able to add any value whatsoever. 

So in some sense, it is like, yes, we take a little bit of this poison, 

but we are going to save the patient because you have the opportunity to get in there and fight the good fight. 

Senator LEVIN. Right, and make profit. 

Mr. MICHALEK. He did not mention that. 

Senator LEVIN. He may not have mentioned it, but obviously—— 

Mr. MICHALEK. It was definitely a part of that. It was clearly— 

I mean, this was in the context of a discussion where my job was 

on the line, and it had already been said earlier in the conversation 

that if you are difficult in the transactions, there is no choice but 

to replace you. 

Senator LEVIN. That is pretty devastating, I tell you. Mr. 

Kolchinsky, what is your reaction to this kind of an email here? 

Mr. KOLCHINSKY. It is very disturbing, and as the folks on this 

panel said, this is something we witnessed. Market share did drive 

the credit analysis, and I think that is why I was also let go from 

the rating agency. 

Senator LEVIN. Because you objected to it being the driver? 

Mr. KOLCHINSKY. I objected to it being the driver. I went ahead 

and tried to prevent us from what I believed was committing securities fraud. 

Senator LEVIN. Dr. Cifuentes, what is your reaction when you 

see an email like this? 


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1See Exhibit No. 24a, which appears in the Appendix on page 318. 

Mr. CIFUENTES. Well, I do not think I have a lot of original 

thoughts to add after what my colleagues have said, but it is kind 

of obvious. It is really a little bit troubling. 

Senator LEVIN. Take a look, if you would, at Exhibit 24a.1 Mr. 

Kolchinsky, by October 2007, Moody’s had downgraded hundreds of 

RMBS securities, and was in the process of downgrading billions of 

dollars of CDOs. Yuri Yoshizawa wrote to you, ‘‘Can you take a 

look at the deals that we didn’t rate from the spreadsheet that Ivy 

sent out last night to double check the information and to let me 

know of any of the ‘stories’?’’ 

And an earlier email in that chain says, ‘‘Market share by deal 

count dropped to 94 percent. . . . It’s lower than the 98+% in prior 

quarters.’’ 

Is this something you got frequently, this kind of reference to 

market share, up, down, as being a driver? 

Mr. KOLCHINSKY. Yes, sir. These emails were sent out, the market share emails were sent out at least quarterly, but occasionally 

on a monthly basis. They were sent out to just the managing directors in a given group. 

Senator LEVIN. I will tell you something. For a firm that is supposed to have a reputation of high quality right in the middle of 

a financial crisis to be looking at the market share issue instead 

of whether their ratings are decent and whether or not what happened, how could our ratings have been so wrong, how do we improve it. What is on their mind: Market share, market share, market share. 

Mr. Kolchinsky and Mr. Michalek, let me ask, at Moody’s did employees understand that the amount of market share that was 

maintained or increased by the RMBS and CDO groups influence 

the size of the employee year-end bonus? 

Mr. KOLCHINSKY. It was certainly the case in terms of the revenues impacted the stock, and most employees owned either a lot of 

options or restricted stock in the company, as well as the profitability of the group did influence the size of the bonus, yes. 

Mr. MICHALEK. It was even more pointed than that. I think that 

we underwent a revision in the compensation structure—I am not 

going to be able to remember exactly the date; I think it was in 

2006—where a larger percentage of our compensation was going to 

be delivered in terms of deferred compensation. So it became more 

important to see that what we were looking at was whether or not 

we were reaching our revenue numbers on a quarterly and annual 

basis which would allow us to, ‘‘maximize our—or max out our bonuses.’’ 

Senator LEVIN. And that meant that the ratings that you would 

give or not give to the banks could affect your bonuses? 

Mr. MICHALEK. Could affect your bonus. Clearly, if for any reason you were stopping a deal or delaying a deal or creating an 

issue with the relationship between the banker and Moody’s, that 

was a problem. 

Senator LEVIN. And this is the fundamental conflict of interest 

that we need to do something about in the legislation. Would you 

agree, Mr. Kolchinsky? 


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Mr. KOLCHINSKY. Yes, sir. that is correct. 

Senator LEVIN. Mr. Michalek, would you agree? 

Mr. MICHALEK. Absolutely. 

Senator LEVIN. Mr. Raiter, would you agree with that? 

Mr. RAITER. Yes, sir. 

Senator LEVIN. Dr. Cifuentes. 

Mr. CIFUENTES. Yes, I do. 

Senator LEVIN. And it is legislation which is hopefully going to 

be allowed to be debated. We will find that out Monday night. But 

this is an issue which is not in the bill yet, and it has to be somehow or other put in that bill. There has got to be a way that the 

regulators are going to find to eliminate this conflict of interest. It 

is shocking that whether or not something is rated AAA or whatever—and that means something to people. I mean, it may mean 

too much to some people, by the way. It may mean more than technically it should mean. But it means a great deal, and legally 

means probably too much in terms of where some entities are allowed to invest or not invest. But that fact of life, it should not be 

dependent upon—the credit rating; it should not determine a bonus 

of somebody who is giving the rating. It is so clear, it is so obvious, 

there is such a fundamental conflict here to me. Your testimony is 

going to be very helpful to us in hopefully getting rid of that conflict and directing the regulators in whatever the new regulatory 

regime is to end that conflict of interest. It goes right to the heart 

of a rating, which is supposed to be an honest, objective, independent assessment of the likelihood of an investment paying off. 

And it is not performing that function when you have this kind of 

pressure on people to rate a certain way in terms of their own pay. 

Now, we had a situation, Mr. Raiter, I believe when you were 

head of RMBS, when you helped develop a model that was used to 

rate the RMBS securities. Then there was a period where S&P was 

doing very well in terms of revenue, and you asked senior management to buy mortgage data on the new types of mortgages so that 

you could improve that model. Is that correct? 

Mr. RAITER. Yes, sir. 

Senator LEVIN. And did you get the money? 

Mr. RAITER. No, sir, not while I was there. 

Senator LEVIN. OK. So this was supposed to keep models current 

and to do surveillance, so-called. Is that correct? 

Mr. RAITER. Well, predominantly to build models, but to be made 

available for surveillance at the loan level detail. 

Senator LEVIN. All right. Do you know why S&P did not spend 

the money on better analytics? 

Mr. RAITER. No, sir, I do not. 

Senator LEVIN. Now, there are also some things that should not 

happen regardless of the complexity of how you design a better system. There are some things, it seems to me, that are clearly wrong 

that happened and should not happen. 

In the subprime loan deals, a number of loans in which borrowers paid a low initial rate, sometimes interest-only payments, 

and then after a specified number of months or years, switched to 

a higher floating rate that was often linked to an index. Did you 

have any data at the time as to how those subprime loans would 

perform? Mr. Raiter, did you have data? 


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Mr. RAITER. The model that is referenced in a number of these 

exhibits that we have looked at, the Version 6.0 was the first data 

set that we had that had a significant amount of information on 

those hybrid pay option type of loans. And it was the analysis of 

those loans that suggested that we were underenhancing or being 

overly optimistic and was the primary reason for trying to push 

that model into production as soon as possible in 2004 or at the 

most 2005. 

Senator LEVIN. Because you were trying to test as to whether or 

not that kind of a product would increase the risk of nonpayment. 

Is that correct? 

Mr. RAITER. Well, the products started to appear in 2003, but in 

very small numbers, and by 2004, when we built this database, we 

had more significant information on those types of products that indicated that what we thought—how we thought they were going to 

behave in the initial versions were—it was behaving worse than 

that, and we needed to get the new model in place because it had 

more data and gave us a better look at how these things might perform. 

Senator LEVIN. Was there a delay in putting that new model in 

place? 

Mr. RAITER. Well, we had some preliminary results in early 2004. 

I left in April 2005, and I believe the model was delivered in September 2006. And I do not know if it was ever implemented. 

Senator LEVIN. All right. Now, some of the subprime loans also 

used stated income loans in which the lender just accepted a borrower’s oral presentation of his income and did not verify it. In 

your judgments, would that make loans riskier to have unverified 

income in these loan applications? 

Mr. RAITER. Yes, sir, they were considered riskier. 

Senator LEVIN. All right. Would you all agree with that, it would 

be riskier if there was no verification of income? 

Mr. MICHALEK. Absolutely. 

Senator LEVIN. OK. Mr. Kolchinsky. 

Mr. KOLCHINSKY. Yes. 

Senator LEVIN. Would you agree with that, Dr. Cifuentes? 

Mr. CIFUENTES. Yes. Actually, the real point is what you do 

about that. I mean, if you know it is riskier, you take precautions 

and you do your analysis with much more conservative assumptions. That is really to me the bottom line. 

Senator LEVIN. All right. Mr. Raiter, going back to you again, 

you had insufficient data to predict how a new loan would perform. 

Was there something assigned called a magic number? 

Mr. RAITER. When we could not get the data in order to do a full 

analysis on a major revision to the model, they would come up with 

a multiplier that could be applied to the model results that were 

being run, which were inadequate in order to beef that number up. 

And it was always intended that those magic numbers would be replaced with full-blown analytics when the data came in. And it is 

my understanding that there were some magic numbers installed 

in early 2005, when they made adjustments to the existing model, 

and if they were massaging information on the 6.0 model when it 

came out, it would typically be in the form of these multipliers that 

they would use. 


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Senator LEVIN. Was there a fee charged for surveillance? 

Mr. RAITER. Yes, sir. Surveillance was a profit center. 

Senator LEVIN. And there was a fee, perhaps a large amount, 

that was supposed to last for the life of the security. Is that correct? Were surveillance fees smaller than the initial rating fees? 

Mr. RAITER. Yes, very much smaller. 

Senator LEVIN. But they were supposed to pay for ongoing ratings and re-ratings, were they not? 

Mr. RAITER. Right, the ongoing review of the rating. 

Senator LEVIN. Let me ask you, Mr. Cifuentes, perhaps. If a ratings model changes its assumptions or criteria, for instance, if it 

becomes materially more conservative, how important is it that the 

credit rating agency use the new assumptions or criteria to re-test 

or re-evaluate securities that are under surveillance? 

Mr. CIFUENTES. Well, it is very important for two reasons: Because if you do not do that, you are basically creating two classes 

of securities, a low class and an upper class, and that creates a discrepancy in the market. At the same time, you are not being fair 

because you are giving an inflated rating then to a security or you 

are not communicating to the market that the ratings given before 

were of a different class. So I think the right thing to do is to analyze or actually re-analyze all the transactions with the new parameters. 

There is no revenue involved in that, as you probably suspect. 

Senator LEVIN. Mr. Raiter, were there discussions within S&P 

about using rating models to conduct surveillance? 

Mr. RAITER. Yes there were. 

Senator LEVIN. And were those discussions heated at times? 

Were there disagreements over that? 

Mr. RAITER. Yes, there were disagreements. Yes, sir. 

Senator LEVIN. What was the argument about? 

Mr. RAITER. Well, there was a certain number of analysts on our 

side that thought that it would make a lot of sense to protect the 

investors, go back and look at exactly how these deals were performing with new criteria and with the marks that were available 

in the model to mark the properties when the prices went down or 

up. And there was the other side of the argument that it would increase ratings volatility which might make us look bad in the eyes 

of the investor and could cost us market share. 

Senator LEVIN. So the market share was a factor there as well 

as to whether or not you would use the new available information 

to re-rate the existing securities? 

Mr. RAITER. Yes, sir. 

Senator LEVIN. Mr. Michalek, was there a restricted list for rating analysts at Moody’s who were prohibited from working with 

certain banks? 

Mr. MICHALEK. I do not know if there was such a list. 

Senator LEVIN. Were you on a restricted list where you could not 

work for Goldman or Credit Suisse? 

Mr. MICHALEK. There were quite a number of banks that had 

previously requested that I not be assigned to their transactions. 

Senator LEVIN. And they were complaining about you? 

Mr. MICHALEK. There was a variety of complaints, that I would 

be either too aggressive, too abrasive, or that I was asking for 


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things that were not being asked for by other analysts in the transactions. 

Senator LEVIN. Was that in your mind because at least in some 

of the cases you were asking too many questions which would negatively affect the rating? 

Mr. MICHALEK. Absolutely. It was a case that I attempted to provide the same analysis to every transaction that came into my 

view, and, unfortunately, we were not facing the same set of bankers on the other side of the phone. 

Senator LEVIN. Let me just ask a couple questions quickly about 

synthetic CDOs. There was a huge increase in those. I think everyone knows the numbers or at least knows of the large numbers 

that were being rated. Did those synthetics cause any problems for 

credit rating agencies? Mr. Kolchinsky. 

Mr. KOLCHINSKY. Yes, sir. The synthetics, the key element of 

synthetics is their complexity as well as their flexibility. 

Senator LEVIN. And were they being used to short the market a 

lot? 

Mr. KOLCHINSKY. From news reports I understand yes. 

Senator LEVIN. And if they were being used to short the market, 

would that be saying something about the quality of the reference 

to the assets? Logically, would it be saying something about the assets being referenced? 

Mr. KOLCHINSKY. I think if you hear all the stories of folks shorting not just a few securities but in size and massively, I think they 

obviously had a view that these securities were not that good and 

the whole market was going to collapse. 

Senator LEVIN. And is it correct that you supervised the staff at 

Moody’s that rated the transaction known as Abacus? 

Mr. KOLCHINSKY. That is correct. That was under my business 

line. I think you are referring to the ABACUS AC1. 

Senator LEVIN. That is correct. 

Mr. KOLCHINSKY. In the 2007–AC1. That was under me. I staffed 

the transaction. I was not involved in it day to day. 

Senator LEVIN. Were you aware that the bank that presented the 

deal to Moody’s was Goldman Sachs? 

Mr. KOLCHINSKY. I was. 

Senator LEVIN. And have you seen reports that the Paulson firm 

shorted the ABACUS transaction using Goldman Sachs as its 

agent? 

Mr. KOLCHINSKY. I have seen the recent reports on the SEC complaint. 

Senator LEVIN. And have you also seen reports that Paulson 

played a role in selecting referenced assets for the ABACUS CDO 

that he expected to perform poorly? 

Mr. KOLCHINSKY. I have seen those. 

Senator LEVIN. And were you or your staff aware at the time 

that Moody’s was working on the ABACUS rating that Paulson was 

shorting the assets in ABACUS and playing a role in selecting referenced assets expected to perform poorly? 

Mr. KOLCHINSKY. I did not know, and I suspect, I am fairly sure, 

that my staff did not know either. 

Senator LEVIN. And are these facts that you or your staff would 

have wanted to know before rating ABACUS? 


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Mr. KOLCHINSKY. From my personal perspective, it is something 

that I would have wanted to know, because it is more of a qualitative not a quantitative assessment if someone who intends the 

deal to blow up is picking the portfolio. But, yes, that is something 

that I would have personally wanted to know. It changes the incentives in the structure. 

Senator LEVIN. Are people usually putting deals together that 

want the deal to succeed? Isn’t that the usual assumption? 

Mr. KOLCHINSKY. That is the basic assumption, yes. 

Senator LEVIN. And if the person wanting the deal to blow up is 

picking the assets, that would run counter to what the usual assumption is? 

Mr. KOLCHINSKY. It just changes the whole dynamic of the structure where the person who is putting it together, choosing it, wants 

it to blow up. 

Senator LEVIN. Well, I could not agree with you more. Senator 

Kaufman. 

Senator KAUFMAN. Thank you. I would just like to touch on a few 

things here. Grandfathering. What are the factors in deciding 

whether you grandfather or not, Mr. Raiter? 

Mr. RAITER. Can you define the term ‘‘grandfather’’? 

Senator KAUFMAN. In other words, finding out—going back and 

you look at securities, things you have already rated, and deciding 

whether you are going to apply a grandfather to that. 

Mr. RAITER. Well, you do not grandfather them. They do get 

surveilled. There are just different levels of criteria that you can 

apply in taking a look at how a deal is performing. One way is to 

look at the pool level and decide that we are just going to track the 

delinquencies, the foreclosures, and the losses. Another way is to 

use the loan level on the transaction. If you can get updated loan 

level files, then you can basically re-rate the transaction based on 

today’s economics, today’s house prices, and changes in the credit 

quality of the borrowers and get a better look at how it would perform today if you were going through the process. 

Those two different ways to surveil can produce dramatically different results. 

Senator KAUFMAN. Mr. Michalek, after you changed the model 

that you were using, you decided whether to go back and use the 

new model to older loans, is that correct? 

Mr. MICHALEK. Again, I think this is outside of my expertise. 

Senator KAUFMAN. OK. Mr. Kolchinsky. 

Mr. KOLCHINSKY. In the CDO world, a lot of times deals that 

were out there and closed ended up being grandfathered. For some 

practical purposes, some of the models that the deals used, for example, a diversity score model or a CDO model which were provided by Moody’s were almost baked into the deal. And as a result, 

when that model changed—and that model had actually a positive 

effect in terms of for the deal’s compliance—a positive meaning 

that there is a direct line that you have to comply with this test. 

There was no way for us to say now you have to stop using that 

old model, use the new model. We could have applied the new 

model on the portfolio. We had the portfolio. But that step was not 

taken. Usually we let deals who used old models continue using 

those models. 


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Senator KAUFMAN. Mr. Cifuentes. 

Mr. CIFUENTES. I left Moody’s in 1999. 

Senator KAUFMAN. OK. 

Mr. CIFUENTES. But we did not really have that issue. At that 

time the market was really very small compared to what it is 

today. 

Senator KAUFMAN. Mr. Raiter, did you have an indication that 

stated income loans were being used in any of the instruments that 

you were dealing with? 

Mr. RAITER. Yes. stated income loans were there. They were 

known as ‘‘liar loans,’’ ‘‘NINAs.’’ When they started using the stated income loan concept in the late 1990s, it was applied to the 

highest credit borrowers—doctors, lawyers, self-employed people. 

As they started developing in the subprime arena, again, you started out with the top of the subprime market with the initial loans 

that were coming into the bonds. 

By 2004 and 2005, with the new hybrids and the stated numbers, 

you were stepping down to much lower FICO scores, much lower 

credit quality of the borrower, and there was evidence starting to 

bubble up that brokers were impacting the way stated income was 

put on the various applications, that there were questions about 

appraisals, whether they were accurate or not. 

So when they first started out with the no-income, low-doc kind 

of loans, we did have modeled in the ratings process higher credit 

enhancements for those loans, and as we tried to collect data on 

the new products that were developing and how they performed or 

were expected to perform, we were factoring that into the models. 

And, again, I hate to beat a dead horse, but we had a 2.8 million 

loan set that was used to build the Version 6.0 of the model, and 

at that time it had the most information we had collected on the 

hybrid loans. And the next data set that we were trying to collect 

had almost 10 million loans in it, and it was even more powerful. 

Senator KAUFMAN. Right. 

Mr. RAITER. So we were always looking forward to getting that 

additional information to make a better judgment as to how things 

were performing without waiting for those portfolios to start going 

bad. 

Senator KAUFMAN. Do you think the decision not to move with 

the more advanced models was a financial decision, or do you think 

it was a decision made with the fact that it was going to make 

things more difficult to give higher ratings and, therefore, be not 

as competitive? 

Mr. RAITER. I think the initial decisions not to fund it were because of resource constraints and the desire to maintain higher 

profits. I think the decisions that were made when it was finally 

developed and available for implementation would indicate whether 

they were starting to take a more serious look at what the impact 

on market and profitability was than just the analytics. I was gone 

by then. 

Senator KAUFMAN. Mr. Michalek. 

Mr. MICHALEK. Senator, I wanted to just bring to the attention 

of the Subcommittee that what you are in part drawing out is an 

extreme reliance on modeling and on the quantitative analysis that 

was going on. To the extent that you had a stated income loan or 


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a NINJA loan, effectively it was simply another data input for 

which you could make some assumptions. 

So there was necessarily a stepping back on some level, in my 

mind, of the qualitative analysis of what was going on down below, 

and instead you were saying, ‘‘Can we model it? Yes. Do we need 

to adjust our assumptions? Perhaps.’’ And the debate would then 

be around: Is this the correct adjustment to the assumption? 

Senator KAUFMAN. Right. But at some point, if, as Mr. Raiter 

said, it starts out being a very small problem at the very top for 

people with high income and now it is getting wider and wider and 

wider use, because I can understand, modeling works great because 

those stated income loans, from everything I gather, when they 

first started, high income, they had very few defaults. But it was 

clear to everyone that early on, Mr. Raiter, when you were still 

there, stated income loans were becoming a larger and larger part 

of the portfolio. 

Mr. RAITER. Well, they were growing, but in 2004 and early 

2005, they had not reached the numbers that were on your slide. 

And, again, we had a data set that told us that we needed to increase the numbers in our model, and the fact that it did not get 

implemented in a timely manner, those increases were just postponed. 

Senator KAUFMAN. Right. 

Mr. RAITER. But the other side of it is, in all candor—and I do 

not want to get into an analytical debate. But when you have pools 

coming in with 1,000 to 10,000 loans, each one with about 85 to 

100 data points, it is difficult to have an individual sit there and 

look at a printout and come up with some qualitative decision on 

what is a five-basis-points difference in enhancement at the AAA. 

You cannot do these products without models. And if there is an 

area that you might address, the Fair Credit Reporting Act prevents the rating agencies from getting the kind of in-depth information on borrowers that would help them gauge the credit performance expectations. 

Senator KAUFMAN. Right. 

Mr. RAITER. It is post the loan being made, so it is not going to 

be a disparate impact on—— 

Senator KAUFMAN. Good point. 

Mr. RAITER [continuing]. People trying to get a loan, but it gives 

the credit rating agencies that additional amount of information to 

help them track and determine how they will behave. We did not 

get the income. We had to back into the income numbers with the 

ratios they gave us for the mortgage in the front and back end, because we were not allowed to collect it. 

So there were some issues there with just the information being 

made available that would take us out of the box. 

Senator KAUFMAN. Mr. Kolchinsky—— 

Mr. CIFUENTES. If I could add something—— 

Senator KAUFMAN. Yes. 

Mr. CIFUENTES. For example, in that situation, clearly you receive 10,000 loans, there is no way you can examine each one of 

those, and I would not expect a rating agency or anybody to do 

that. However, having said that, if a banker comes to you and he 

tells you, look, I have 10,000 loans, these are the characteristics of 


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the loans, one reasonable thing you can do is you take a random 

sample, see if what you find agrees with what the banker tells you, 

and that gives you an idea. We did that many times when I was 

there at the CDO Group, not in the context of mortgages but in the 

context of different things. So that would be a way to handle the 

situation. 

Senator KAUFMAN. Mr. Kolchinsky. 

Mr. KOLCHINSKY. On this issue, I am actually more in Mr. 

Michalek’s camp because I believe models are important and you 

cannot do these without models. But models are—you need a 

human being to have a quality judgment of what the results are 

and what the input is into a model. 

A financial model is like a weapon. You really have to—it could 

be useful if you are holding it, not so useful if it is being pointed 

at you. And my experience has been once the model is out there, 

once it has been published, bankers, originators understand how to 

game that model. 

Senator KAUFMAN. Exactly. 

Mr. KOLCHINSKY. And they will—anecdotally, I understand there 

is some good data on some of these no-income loans because most 

of the early borrowers, the loan officer knew the borrower, was 

driving around—was the plumber who worked off the books, had 

that information. But to extend that information to the whole universe of borrowers is maybe statistically workable, but does not 

make sense. And that is where you need a sort of qualitative judgment—I know why this was happening, but the model does not 

make sense to me anymore. 

Senator KAUFMAN. And I think one of the classic examples—anybody who has read Michael Lewis’ ‘‘The Big Short’’—was barbelling. Are you familiar with barbelling? 

Mr. KOLCHINSKY. Yes. It is layering of poor assets with good assets in the same portfolio. 

Senator KAUFMAN. And isn’t it almost a perfect example of what 

you were just saying, where people now begin to game the model? 

They are not trying to figure out what the best product is. They 

are trying to put together a product that meets with the model. 

Mr. KOLCHINSKY. One of the lessons learned for me personally is 

that averages lie. So if you have a model rolling by an average, it 

is not telling you all the information. 

Senator KAUFMAN. Mr. Michalek, do you have any comments on 

barbelling? 

Mr. MICHALEK. It was an early example of how we had to respond in what became an aggressively or an increasingly aggressive game of cat and mouse, that effectively once we had published 

some criteria and this was the established requirement, we would 

quickly see that here was a set of reactions—here was a portfolio 

that presented some compliant averages, as Eric was referring to. 

And so then there was our response to that, in which case that generated yet another response to that. And so it goes. 

Senator KAUFMAN. Mr. Raiter, was barbelling a problem when 

you were still—— 

Mr. RAITER. I think it may have been raising its head, but you 

can fight the concept of barbelling only by maintaining the models 

as accurately and based on the most amount of data you can get. 


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And that just requires that—frankly, as the market exploded and 

the new products arrived, we really should have been looking at 

coming out with new models every 6 months, a year at the worst. 

Anybody is going to try and game it, and the only way you can 

avoid gaming is to keep improving it and changing it so you capture the nuances that allowed the gaming. 

Senator KAUFMAN. Did you have any indication management was 

concerned about this? This has come up as another one of the problems, just this massive flood of new business. I mean, business just 

exploded based on the chart we saw earlier, and it is a little like 

having a restaurant and tripling the number of people eating there 

without keeping the same kitchen. Did you see any indication by 

management they were concerned about the fact that we were not 

doing these new models, we were getting a massive influx of new 

business, this could be a real problem? 

Mr. RAITER. No, we did not get any indication that it really bothered them because they were turning us down for staff, they were 

turning us down for the resources we needed. And what they were 

looking at was you must not have been working very hard because 

your volume has doubled and nobody is quitting, so I guess you had 

slack down there. 

Senator KAUFMAN. Right. 

Mr. RAITER. And they were just enjoying the revenue, and by 

2005, when I left, we were getting calls from corporate monthly: 

How much money are you going to make this month? Structured 

was driving the whole ratings business, and RMBS was the fastestgrowing unit. 

Senator KAUFMAN. Mr. Michalek, it was 2005 when Mr. Raiter 

left. I think by 2007, 2008, people must have been getting—there 

must have been some understanding by the management that this 

was not all going well. 

Mr. MICHALEK. Absolutely. There had to be. 

Senator KAUFMAN. Did you ever see any indication of that? 

Mr. MICHALEK. Certainly one good example would be in the effort to try to catch up, it was clear that from 2004 on, we were 

playing a game of catch-up in terms of staffing, in terms of systems. We were trying to transfer a lot of the input for our monitoring process to sources offshore to try to speed up the quantity 

that was being driven through. We were working on developing a 

model for doing the monitoring. But effectively all of the resources 

were being directed backward trying to fix what was acknowledged 

to be broken as opposed to trying to get ahead of what was coming. 

All the energy that was directed forward effectively was how do we 

survive this onslaught of work. 

Senator KAUFMAN. Did you ever philosophize about what they 

were thinking in management? Clearly, the brand was not doing 

well. You could see an erosion of the quality. 

Mr. MICHALEK. Sure. I think that it was common to commiserate, 

particularly amongst the rear guard, those that had been there 

longer, and the culture changed the most dramatically, that the 

place is not what it once was, I do not know what they are thinking. Personally I was anticipating a steady erosion until there was 

just a pure equivocation between the rating agencies. So it was a 


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matter of just throwing a three-sided dice and you would pick that 

rating agency, it did not matter anymore. 

It was disappointing, but for those that did want to try to continue to pursue the good fight, if you will, I think we did our best 

under the circumstances. 

Senator KAUFMAN. Mr. Kolchinsky. 

Mr. KOLCHINSKY. I think the drive for market share was front 

and center, and any other resources did not really matter as much, 

and the focus was how much revenue we made. 

Senator KAUFMAN. I got that. Did you have any indication that 

management was aware of the fact that the incentives—all the 

things we talked about, the lack of regulation, the incentives, market share, profit, that they realized that there was an erosion of 

the product and that this was not a good long-term strategy? 

Mr. KOLCHINSKY. I do not know. They must have understood 

that this is not something that could continue, but I am not sure 

if they did or not. 

Senator KAUFMAN. All right. Mr. Cifuentes, from your vantage 

point far away from this, how did it look to you? 

Mr. CIFUENTES. Well, my view here is a little bit from an outsider because, as I said, I left in 1999. 

Senator KAUFMAN. Right. 

Mr. CIFUENTES. But being in the market until recently—to some 

extent I am still in the market—I know this—and I could not claim 

that I was the only person who did—a few funny things going on 

regarding the rating assumptions and the models at both Moody’s 

and S&P. 

For example, I remember I gave a talk at the CDO conference 

at the end of 2006, and I made the point that there were many 

changes to many things—default probabilities, correlations, things 

that might sound too technical here. But the speed of the change 

was a little bit suspicious. There were some changes at that time 

to something called correlation, which would probably do not have 

the time to discuss what it means here, but basically it amounted 

to a relaxation of the standards. 

So anyone looking at the rules of the game from the outside 

would have noticed that certain assumptions that were being made 

in the past, now they were a little bit relaxed, and certain transactions that were receiving AAA ratings probably, with just a quick 

back-of-the-envelope calculation, you could come to the conclusion 

that they were probably not. 

Senator KAUFMAN. I am just going to end my questions now. Just 

anybody—we have been here for a while talking about this. Is 

there anything you can say to kind of sum up what you think went 

on during this period? 

Mr. CIFUENTES. Thank you, Senator. I would like to add a brief 

point here, if I may, because I think it is relevant. It might sound 

like a too academic or subtle point, but I think it is very profound, 

because the problem that we have here, I believe, is a little bit 

more serious than what we think it is. 

We have been talking here about AAA, BBB, and the rating 

agencies clearly were given the right to determine whether something is AAA or BBB or whatever. Fine. But there is another level 

of complexity here. Congress has given the rating agencies also the 


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right to define what AAA means, or BBB for that matter. So, in 

effect, Congress has given the rating agencies the right to legislate, 

and this is a little bit crazy because let me give you an example, 

and I think I am going to finish my statement here. But I think 

sometimes an example is a little bit more clear than a lengthy explanation. 

Suppose you pass a law stating that, say, in Washington, DC, 

you cannot build a tall building, but you forget to define what ‘‘tall’’ 

means. And now there is a private company that will decide what 

‘‘tall building’’ means. So that company might decide that it is a 

five-story building. Next year they might change, and it is a tenstory building. So that remains undefined. 

So that is the situation we have right now. Nobody knows what 

BBB means. The only thing that is known is that, for example, if 

you are a particular company, you cannot buy anything with a rating below BBB. If you are a pension fund and you buy a BBB asset 

and it is downgraded, you might be forced to sell. But who knew 

what BBB means? Well, it does not really matter because the rating agencies not only determine whether something is BBB, but 

they can change the definition of what BBB means. And I think 

that is a very extraordinary state of affairs. I mean, it is really— 

it is very screwed up at a very fundamental level. 

Senator KAUFMAN. Because essentially the ratings are used by 

the regulatory agencies to make decisions and, therefore, you are 

right, I mean, I never thought of it that way, but essentially the 

rating agencies are determining on their own—— 

Mr. CIFUENTES. Exactly. 

Senator KAUFMAN [continuing]. What these ratings actually are, 

and then the ratings are used—— 

Mr. CIFUENTES. Legislating all the time. 

Senator KAUFMAN. Right. Thank you very much, Mr. Chairman. 

Senator LEVIN. I just have a couple more questions for this 

panel. Did investment bankers apply pressure in connection with 

rating analysts during the rating process? We have already seen 

some evidence of pressure, but in terms of, for instance, getting 

deals done quickly, increasing size of the tranches to make additional money, were those kind of pressures put on the analysts during the rating process? Mr. Kolchinsky. 

Mr. KOLCHINSKY. Yes, all the time. 

Senator LEVIN. Mr. Michalek. 

Mr. MICHALEK. It was part of the daily workload. 

Senator LEVIN. Mr. Raiter. 

Mr. RAITER. Well, it was not particularly prominent in residential because our model was distributed. Everybody got the same answer. We could not have Bear Stearns run a deal and bring it in 

and get a structure and have Goldman bring the deal in and get 

something else. People would say, ‘‘Well, how did they get a different transaction?’’ So we were somewhat insulated. 

Senator LEVIN. In your particular area. 

Mr. RAITER. In this particular area, yes, sir. 

Senator LEVIN. And in terms of that kind of pressure that you 

felt, let me ask you, Mr. Kolchinsky. Did you ever hear the phrase 

IBG–YBG? 

Mr. KOLCHINSKY. Not until today, sir. 


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Senator LEVIN. Mr. Michalek, did you ever hear of that? 

Mr. MICHALEK. That was quoted to me. 

Senator LEVIN. When you worked there? 

Mr. MICHALEK. I was working on a transaction, and I think it 

was—well, the name of the bank is not relevant. It was a large 

bulge bracket bank. 

Senator LEVIN. It was a large? 

Mr. MICHALEK. Bulge bracket bank. 

Senator LEVIN. What does that mean? 

Mr. MICHALEK. A bulge bracket bank is describing one of the 

largest banks that has a large balance sheet. 

Senator LEVIN. All right. What bank is that? 

Mr. MICHALEK. I think it was Deutsche Bank. 

Senator LEVIN. OK. And then, what does it mean? 

Mr. MICHALEK. IBG–YBG was explained to me to mean, ‘‘I’ll be 

gone, you’ll be gone. So why are you making life difficult right now 

over this particular comment?’’ Effectively—I mean, he said it 

laughingly as if you are losing perspective here. 

Senator LEVIN. Did it mean to you that basically you ought to 

think short term because everybody would be gone before the 

chickens came home to roost? 

Mr. MICHALEK. When it was originally told to me, I did not realize how that thinking really was driving much of what was going 

on, actually. 

Senator LEVIN. Short-term thinking. 

Mr. MICHALEK. Short term, get this deal done, get this quarter 

closed, get this bonus booked, because I do not know whether or 

not my group is going to be here at the end of next quarter, so I 

have to think of this next bonus. 

Senator LEVIN. Who basically did your agency think was the client? Was it the investment banker or was it the investor? Mr. 

Kolchinsky. 

Mr. KOLCHINSKY. It was the banker. The bankers were typically 

referred to as clients. If an investor called, they would be clients, 

but they never did. It was just simply the bankers, and they were 

the clients. 

Senator LEVIN. Do you have any more? 

Senator KAUFMAN. No. 

Senator LEVIN. Thank you. You have been very helpful, all of 

you. Some of you have come a long distance. We greatly appreciate 

it. 

Mr. KOLCHINSKY. Thank you. 

Mr. CIFUENTES. Thank you. 

Senator LEVIN. We will now move to our second panel of witnesses: Susan Barnes, currently Managing Director for MortgageBacked Securities and former North American Practice Leader of 

Residential Mortgage-Backed Securities at Standard & Poor’s; Yuri 

Yoshizawa, Group Managing Director for Structured Finance at 

Moody’s Investors Service; and, finally, Peter D’Erchia, currently a 

Managing Director of U.S. Public Finance and former Global Practice Leader of Surveillance at Standard & Poor’s. We thank you for 

being with us today. 

We have a rule here, which I think you are familiar with, Rule 

VI. I believe you were here when I said that it requires us to ask 


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1The prepared statement of Ms. Barnes appears in the Appendix on page 155. 

all of our witnesses to please stand and be sworn in. Raise your 

right hand, if you would. Do you swear that the testimony you are 

about to give will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Ms. BARNES. I do. 

Ms. YOSHIZAWA. I do. 

Mr. D’ERCHIA. Yes. 

Senator LEVIN. Was that a yes? 

Mr. D’ERCHIA. Yes. 

Senator LEVIN. The timing system we will be using today, again, 

you may have heard it, but there will be a red light that will come 

on about 5 minutes from after you begin. A minute before that 

light comes on, it will be changing from green to yellow, which will 

give you a chance to conclude your remarks. We will print your entire testimony in the record, of course. We would ask you to try to 

limit your oral testimony to no more than 5 minutes. 

Ms. Barnes, we will have you go first, and then follow that testimony by Ms. Yoshizawa and then Mr. D’Erchia. So, Ms. Barnes, 

please proceed. 

TESTIMONY OF SUSAN BARNES,1 CURRENT MANAGING DIRECTOR, MORTGAGE-BACKED SECURITIES, FORMER NORTH 

AMERICAN PRACTICE LEADER, RESIDENTIAL MORTGAGEBACKED SECURITIES, STANDARD & POOR’S 

Ms. BARNES. Thank you. Mr. Chairman, Members of the Subcommittee, good morning. I am Susan Barnes, a Managing Director 

of Standard & Poor’s Rating Services. From 2005 to 2008, I was the 

North American Practice Leader for Residential Mortgage-Backed 

Securities (RMBS). I have been asked to appear today to discuss 

S&P’s ratings for RMBS products. 

I want to begin by saying that at S&P we have learned hard lessons from the difficulties in the subprime residential mortgage 

area. Although the subprime mortgage market improved access to 

credit and homeownership for millions of Americans, apparent 

abuses in that market have had a reverberating impact on the 

economy. 

S&P began downgrading some of its ratings in this area in 2006 

and had warned of deterioration in the subprime sector long before 

that. We were watching this market. But at the end of the day, the 

assumptions and criteria underlying our ratings simply did not anticipate the extent of the collapse of the housing market, which has 

been more severe and more precipitous than we, along with so 

many others, had anticipated. 

Although my focus today is on S&P’s process for rating RMBS securities, it is helpful at the outset to discuss the nature of our credit ratings. At their core, S&P’s credit ratings represent our opinion 

of the likelihood that a particular obligor or financial obligation will 

timely repay owed principal and interest. Ratings do not speak to 

whether an investor should buy, sell, or hold rated securities or 

whether the price of the security is commensurate with its credit 

risk. 


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While evaluating the credit characteristics of the underlying 

mortgage pool is part of our RMBS ratings process, S&P does not 

rate the underlying mortgage loans made to borrowers or evaluate 

or regulate whether making those loans was a good idea in the first 

place. 

Originators make loans and are responsible for verifying information provided by borrowers. They also make underwriting decisions. In turn, issuers and arrangers of mortgage-backed securities 

bundle those loans, perform due diligence on those loans, structure 

transactions, identify potential buyers, and underwrite the securities. 

Our role in the process is to reach an opinion as to the ability 

of the underlying loans to generate sufficient proceeds to pay the 

purchasers of securities issued under stress scenarios that correspond to our rating levels. In doing so, we rely on the data coming from issuers, arrangers, and servicers that other market participants also rely on. For the system to function properly, the market must be able to rely on these participants to fulfill their roles 

and obligations, to verify and validate information before they pass 

it on to others, including S&P. 

S&P’s analysis of an RMBS transaction evaluates the overall 

creditworthiness and expected cash flow of a pool of mortgage loans 

by, among other things, using models that embody and reflect our 

analytic assumptions and criteria. The models apply those criteria 

to particular loan pools using up to 70 different data points regarding each loan provided by the arranger of the securitization. The 

assumptions and analysis embodied in our models are under regular review and are updated as appropriate. 

After reviewing the relevant information, the lead analyst then 

presents the transaction to a rating committee. The qualitative 

judgments of the committee members are an integral part of the 

rating process as they provide for consideration of asset- and transaction-specific factors, taking into account the judgment and experience of the committee members. 

A key component of our analysis is assessing the amount of credit enhancement available to support a particular rating—in other 

words, how much cushion there is in a transaction to account for 

potential losses. For example, subprime loans are expected to perform worse than prime loans, so a transaction backed by subprime 

loans would have significantly more credit enhancement than a 

similarly rated transaction backed by prime loans. Thus, it is not 

the case that through securitization poor credit assets magically become solid investments. Rather, the question is what amount of 

AAA-rated securities can a particular pool of collateral support. 

Once a rating is determined by the rating committee, S&P notifies the issuers and disseminates the rating to the public. Along 

with the rating, we frequently publish a short narrative for information to the public. 

The Subcommittee has asked me to speak to S&P’s awareness of 

deteriorating conditions and reports of fraud in the subprime mortgage market. S&P was aware of these reports, and from 2005 to 

2007 S&P consistently informed the market of its concerns about 

the deteriorating credit quality of the RMBS transactions as set 


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1The joint prepared statement of Ms. Yoshizawa and Mr. McDaniel appears in the Appendix 

on page 186. 

forth in more detail in my written testimony. We also revised our 

models and took action when we believed action was appropriate. 

I thank you for the opportunity to participate in the hearing 

today, and I would be happy to answer any questions you have. 

Senator LEVIN. Thank you very much, Ms. Barnes. Ms. Yoshizawa. 

TESTIMONY OF YURI YOSHIZAWA,1 GROUP MANAGING DIRECTOR, STRUCTURED FINANCE, MOODY’S INVESTORS SERVICE 

Ms. YOSHIZAWA. Good afternoon, Mr. Chairman and Senator 

Kaufman. I am Yuri Yoshizawa, Senior Managing Director of the 

Derivatives Group at Moody’s Investors Service. My group rates 

various types of derivative securities, including collateralized debt 

obligations, better known as CDOs. I would like to thank you for 

the opportunity to provide our views today. 

Moody’s plays an important but narrow role in the investment 

information industry. We offer reasoned, independent, forwardlooking opinions about credit risk. We publish credit rating opinions and credit research about entities, including corporations and 

governments active in the debt capital markets globally. Our credit 

ratings are opinions about the future likelihood of full and timely 

repayment of debt obligations, such as notes, bonds, and commercial paper. 

In rating debt securities, regardless of whether the debt is issued 

by a CDO or by a corporation, Moody’s analysts follow established 

analytical methodologies and adhere to established procedures. I 

will discuss these as they pertain to CDOs, but first I would like 

to give a brief overview of what CDOs are. 

CDOs have been around since the early 1990s. CDOs cover a 

wide range of instruments and can have in their collateral pools 

various types of assets, including securities issued by financial institutions, corporations, and other structured finance securities. 

Additionally, CDOs may either be static or managed transactions. 

In static transactions, the collateral pool typically is not subject to 

change. In managed CDOs, the collateral manager can buy and sell 

assets based on a set of covenants spelled out in the CDO’s governing documents. 

As with all securities that Moody’s rates, our methodology for 

rating CDOs incorporates qualitative and quantitative factors. The 

quantitative factors include the credit risk associated with the collateral backing the CDO and its structure. Some of the qualitative 

factors that we also typically evaluate include the governing documents of the CDO, the collateral manager, and the trustee. The relevance of these and other factors will vary depending on the specifics of individual transactions. 

Moody’s runs its rating process through a committee system; that 

is to say, rating committees decide the ratings rather than any one 

individual. After the analyst obtains relevant information from the 

issuer through meetings and other communications, he or she incorporates information from public sources as well as Moody’s own 

macroeconomic and sector-specific perspective. 


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1The prepared statement of Mr. D’Erchia appears in the Appendix on page 173. 

The analyst then formulates a view and presents it to a rating 

committee. Rating committee members are selected based on relevant expertise and diversity of opinion. Each member is encouraged to express dissenting or controversial views and discuss differences in an open and frank manner. Once a full discussion takes 

place, the members then vote, with the most senior members voting last so as not to influence the votes of the junior members. 

Each committee member’s vote carries equal weight, and the majority vote decides the outcome. 

Once a credit rating is published, we monitor the rating on an 

ongoing basis, and we will modify it as appropriate to respond to 

changes in our view of the relative creditworthiness of the issuer 

or obligation. 

One common misperception is that our credit ratings are derived 

solely from the application of a mathematical process or model. 

This is not the case. Models are tools sometimes used in the process of assigning ratings, but the credit rating process always involves much more—most importantly, the exercise of independent 

judgment by the members of a rating committee. 

Our committee system is at the core of everything we do at 

Moody’s and is designed to protect the quality, integrity, and independence of our ratings. Having said that, we recognize that we 

must continue re-evaluating all of our methodologies and processes 

to determine how they might be enhanced further in order to respond to the evolving market. 

Let me make clear we at Moody’s are not satisfied with the performance of our ratings in RMBS and structured finance CDOs 

over the past several years. In light of the recent crisis, we have 

made a number of enhancements, some of which have been highlighted in Moody’s written testimony. 

Thank you, and I would be happy to take your questions. 

Senator LEVIN. Thank you very much, Ms. Yoshizawa. Mr. 

D’Erchia. 

TESTIMONY OF PETER D’ERCHIA,1 CURRENT MANAGING DIRECTOR, U.S. PUBLIC FINANCE, FORMER GLOBAL PRACTICE 

LEADER, SURVEILLANCE, STANDARD & POOR’S 

Mr. D’ERCHIA. Mr. Chairman and Senator Kaufman, good afternoon. I am Peter D’Erchia, a Managing Director of Standard & 

Poor’s Ratings Services. During 1997 through 2008, I was the Global Practice Leader for Structured Finance Surveillance at Standard 

& Poor’s. 

As the head of that group, I supervised surveillance for five rating and ranking categories: residential mortgage-backed securities, 

RMBS; commercial mortgage-backed securities, CMBS; 

collateralized debt obligations, CDOs; asset-backed securities, ABS; 

and servicer evaluations. 

Each of those groups was headed by a separate manager who reported to me as a member of my management team. S&P’s structured finance surveillance portfolio grew substantially during my 

time as the group’s head. Our resources expanded to meet this increasing workload, and our growth with respect to RMBS in parVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000064 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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ticular outpaced the increase in Standard & Poor’s monitored 

transactions. Standard & Poor’s RMBS surveillance team increased 

in size by 75 percent from the beginning of 2003 through 2006. In 

2007, responding to the unprecedented deterioration in RMBS deal 

performance, the group’s head count increased an additional 57 

percent. 

In order to understand the context for Standard & Poor’s surveillance work in 2006 and 2007, it is important to consider the basic 

process behind Standard & Poor’s surveillance review. After a rating is assigned on an RMBS transaction, a new transaction, it is 

transferred to the Surveillance Group for monitoring. Standard & 

Poor’s surveillance analysis takes information related to the actual 

performance of the rated pool over time, and it uses that performance data to assess whether Standard & Poor’s rating remains appropriate in light of our evolving view of the deal’s current credit 

support. 

Standard & Poor’s surveillance process differs somewhat from a 

new rating review. This difference reflects the practical reality of 

different pre- and post-rating deal metrics, but it also serves an important function in providing a form of analytical check and balance. Therefore, each deal rated by Standard & Poor’s is subjected 

to two analytical processes, providing for a more robust analysis 

than a simple reapplication of the same initial method over time. 

As I noted, the volume of RMBS rated transactions under surveillance at Standard & Poor’s increased throughout the years 2003 

to 2007. In the past, Standard & Poor’s looked for at least 12 

months of performance data, or seasoning, in this analysis and 

used a variety of internal monitoring tools to identify and track individual deals for closer review. In late 2006, as the performance 

of recent vintage U.S. RMBS transactions experienced broad deterioration out of line with our expectations, Standard & Poor’s Surveillance Group began a process of vintage reviews to prioritize the 

review of 2005 and 2006 RMBS transactions and to monitor those 

entire annual vintages on a monthly basis as each month’s actual 

data came in. 

Starting in late 2006 and through the first half of 2007, delinquency data coming in each month did not resemble anything seen 

before. At that point, however, no significant realized losses had 

been reported for the deals under review. Moreover, historically delinquencies did not always lead to losses. Accordingly, there was a 

lot of analyses and debate at Standard & Poor’s to determine what 

that data meant. 

As we received more data throughout early 2007, Standard & 

Poor’s new issue, surveillance, and criteria personnel all worked together to understand what was happening and how to respond. 

During our ongoing analyses in early 2007, Standard & Poor’s took 

numerous significant steps to react to the deteriorating RMBS performance and to inform the market of our analyses. Standard & 

Poor’s recognized the unprecedented nature of the early delinquencies occurring in the 2006 vintage, and it fundamentally 

changed its practice in February 2007 to place issues on Credit 

Watch without waiting for losses to develop. 

Standard & Poor’s continued to downgrade ratings as appropriate on an ongoing basis. By July 2007, Standard & Poor’s had 


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1See Exhibit No. 94b, which appears in the Appendix on page 599. 

adapted its methodology sufficiently to issue a substantial number 

of further downgrades. That evolution continued after July 2007, 

resulting in further downgrades as the subsequent performance 

data and criteria warranted. 

Finally, I would like to thank the Members and the staff of this 

Subcommittee for giving me the opportunity to participate in this 

hearing. In my experience at Standard & Poor’s, we have always 

been committed to doing the best we can to develop and maintain 

appropriate ratings, and I am proud of the hard work that our 

team put in trying to understand and respond to historic market 

disruption to the best of our abilities. I have set forth additional 

information about my own work and Standard & Poor’s public discussion of the RMBS market in my written statement, and I am 

happy to answer any questions you may have. 

Senator LEVIN. Thank you very much, Mr. D’Erchia. 

Let me start with some of the failed deals that we went into with 

the first panel. First, the Vertical deal, if you will look at Exhibit 

94b.1 This is a CDO known as Vertical ABS. An S&P analyst in 

2007 complained about how Vertical’s issuer, UBS, was not cooperating with them and how the deal was unlikely to perform. And 

this is what one S&P analyst wrote in that 2007 email at the top: 

‘‘Vertical is politically closely tied to [Bank of America]—and is 

mostly a marketing shop—helping to take risk off books of [Bank 

of America]. Don’t see why we have to tolerate lack of cooperation. 

Deals likely not to perform.’’ 

Despite that judgment that it was unlikely to perform, S&P 

rated it—so did Moody’s, by the way. Both rated the top three 

tranches as AAA. It defaulted within a few months thereafter. 

Ms. Barnes, S&P’s own analysts were uncomfortable with rating 

the deal, yet it was rated. Should it have been rated? Should that 

have been taken into consideration that there was no cooperation 

there? 

Ms. BARNES. Well, I can’t speak to this specific example, but—— 

Senator LEVIN. But you can speak to the question of whether or 

not if there is a lack of cooperation and a deal is not likely to perform, should it be rated? 

Ms. BARNES. Well, I would say the analyst would take that into 

account, and it would be part of their presentation and discussion 

in the rating committee for all of the members to consider. 

Senator LEVIN. But if an analyst concludes, the analyst on the 

deal, that a deal is not likely to perform, should you be giving AAA 

tranches to that deal? 

Ms. BARNES. Right. I guess, Mr. Chairman, what I am trying to 

emphasize is the committee process at Standard & Poor’s. 

Senator LEVIN. I understand. 

Ms. BARNES. No one person determines a rating, so they can 

have an opinion, and you have differing opinions that will come to 

committee. 

Senator LEVIN. How about if the committee decides the deal is 

not likely to perform? 

Ms. BARNES. If the committee decided that, then it would either 

take action or change the ratings that it would assign at that time. 


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1See Exhibit No. 94e, which appears in the Appendix on page 614. 

2See Exhibit No. 93b, which appears in the Appendix on page 589. 

3See Exhibit No. 93c, which appears in the Appendix on page 590. 

4See Exhibit No. 93d, which appears in the Appendix on page 592. 

Senator LEVIN. All right. And if an analyst says that the Bank 

of America is using the CDO to take the risk off its books, should 

that be a factor? In other words, if the analyst thinks that what 

is going on with the CDO is taking bad assets off the company’s 

books, does that affect the rating process? Should it affect the rating process? 

Ms. BARNES. Right. I mean, I cannot speak to the aspects of a 

transaction that the CDO criteria considers, but whatever the committee thinks is appropriate, and if they think it was material from 

a credit perspective and it could impact the performance of the 

transaction, then I would expect that they would consider it, yes. 

Senator LEVIN. So that it should affect it? 

Ms. BARNES. If they believe that it would affect it, then it should 

be an aspect that they should consider, yes, Mr. Chairman. 

Senator LEVIN. Well, I am asking you not if they think something, then something should happen. I am asking you for your 

opinion. 

Ms. BARNES. I would think—yes, I would agree that it would be 

an aspect from a credit perspective. 

Senator LEVIN. Let me ask you, Ms. Yoshizawa. This is Exhibit 

94e.1 In this 2007 CDO, securities were included that had previously been downgraded the year before, so they had not been performing as expected. Is that common for a CDO to include downgraded assets? 

Ms. YOSHIZAWA. A CDO can include assets that have been downgraded in the past, yes. 

Senator LEVIN. That is common? 

Ms. YOSHIZAWA. It could be common, yes. 

Senator LEVIN. Could be common. All right. Take a look, if you 

would, at 93b.2 In January 2007, S&P was asked to rate a RMBS 

with subprime loans issued by Fremont. Now, Fremont was a 

subprime lender that was known for poor-quality loans. At that 

time an S&P rating analyst sent an email to his supervisor saying, 

‘‘I have a Goldman deal with subprime Fremont collateral. Since 

Fremont collateral has been performing not so good, is there anything special I should be aware of?’’ One supervisor said, ‘‘No, we 

don’t treat their collateral any differently.’’ So that is Exhibit 93b. 

The other one wrote in Exhibit 93c 3 that as long as he had current FICO scores for the borrowers, the analyst was ‘‘good to go.’’ 

Two days later, an article was circulated within S&P noting that 

Fremont was not now using 8,000 brokers, because their loans had 

some of the highest delinquency rates in the industry. That is Exhibit 93d.4

And, by the way, Fremont had also announced in an 8–K filing 

that the California Court of Appeals found that marketing and extending adjustable-rate mortgage products to subprime borrowers 

in an unsafe and unsound manner greatly increased the risk that 

borrowers will default on the loans or otherwise cause losses. The 

suit against Fremont was allowed to continue. Then there was a 


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cease-and-desist order that Fremont entered into with the FDIC regarding fraud and lax underwriting standards. 

Now, despite all this information, we have Fremont RMBS securities rated by both S&P and Moody’s in the spring of 2007. Should 

they have taken those factors into account? Ms. Barnes. 

Ms. BARNES. Well, I would take from this email, Mr. Chairman, 

that they are considering it and discussing it, and the analyst is 

bringing up the points, as we would expect and encourage them to 

do. And the manager is discussing and sharing their views that 

they believe—I guess the criteria at the time was appropriate and 

it should not be modified. 

Senator LEVIN. Well, that may be what they believed, but I am 

asking you what should be the case. Fremont’s collateral has been 

performing ‘‘not so good.’’ That does not make any difference. 

Ms. BARNES. Right. 

Senator LEVIN. According to this email, it does not make any difference. Should it make a difference? 

Ms. BARNES. Well, Mr. Chairman, I guess when we look at the 

models, as we were discussing on the prior panel, the data that is 

used in those models is used from an array of originators and performance and used to establish the expected performance. 

Senator LEVIN. I am just asking a simple, straightforward question. You have an analyst who is saying their collateral has been 

performing not so good. The supervisor says that does not make 

any difference. Should it make a difference? 

Ms. BARNES. Well, I would say it—— 

Senator LEVIN. Do you folks care whether the collateral makes 

a difference? 

Ms. BARNES. Yes, Mr. Chairman, the collateral should make a 

difference. 

Senator LEVIN. So why does he get an answer back from his supervisor saying it does not make a difference? 

Ms. BARNES. Well, again, because it goes in the context of what 

the criteria is including. If you are looking at the overall performance of the industry and how far is it deviating, what they are reporting back to this analyst is that they do not think an outside 

adjustment or change to the assumptions is appropriate at that 

time. 

Senator LEVIN. It is not assumptions. It is having to do with a 

deal. I have a Goldman deal with subprime Fremont collateral. 

Fremont is not performing well. There are all kinds of problems 

with Fremont. 

If Fremont does not get a higher credit risk, I am trying to figure 

out who does. I do not understand how you can just simply say it 

does not make any difference. You folks are supposed to be assessing credit risks here. Does it not make any difference that their collateral is not performing? That is what the email says. We do not 

treat their collateral any differently. Shouldn’t their collateral be 

treated differently if it is not performing? That is a simple question. 

Ms. BARNES. Well, Mr. Chairman, I guess you mean different 

than the industry standard. If it is performing differently than 

what our models projected for that type of loans, then, yes, they 

should—— 


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1See Exhibit No. 93a, which appears in the Appendix on page 587. 

Senator LEVIN. Is the fact it is not performing well relevant? 

Ms. BARNES. It would be relevant to the analysis, but if the—— 

Senator LEVIN. It was not relevant to that supervisor. 

Ms. BARNES. I guess you have to look at it, Mr. Chairman, in the 

context of how the assumptions are built, and the assumptions are 

built on an array of data. So it would depend how far off and where 

that performance is expected to perform. And just because the performance is poor, it does not mean that a deal was underenhanced. 

We can have poor-quality loans put into transactions that have an 

array of credit enhancement that could reflect that poor credit 

quality. So just because delinquencies necessarily are high at that 

time for that particular vintage. 

Senator LEVIN. It is irrelevant? 

Ms. BARNES. I would not say it was irrelevant. What I would say 

that it was ignored. 

Senator LEVIN. He was told to ignore it. Ms. Barnes, take a look 

at 93a.1 I mean, this is the thing which, it seems to me, is going 

to shake up folks that are listening to this testimony as to how 

much these credit ratings can be relied on. Here you have a chart. 

This is at the top of page 2, 93a. Now, this is a Moody’s deal, so 

I am going to ask Moody’s as well. ‘‘Here is the chart of the top 

ten issuers’’ of high delinquencies. It comes back: ‘‘Holy cow—is 

this data correct? I just graphed it and Fremont is such an 

outlier!!’’ In other words, they are terrible. Is that relevant? 

Ms. BARNES. It is definitely relevant. 

Senator LEVIN. So why doesn’t the supervisor say, ‘‘You are 

damn right it is relevant’’? 

Ms. BARNES. Well, I guess I am trying to make a differentiating 

point—— 

Senator LEVIN. You are trying not to answer the question. 

Should the supervisor have said, ‘‘Yes, it is relevant. You better dig 

into this’’? 

Ms. BARNES. It should be relevant in looking at the collateral 

characteristics and estimating the performance, yes. 

Senator LEVIN. Thank you. 

Ms. Yoshizawa, this is Moody’s. Should that have been relevant? 

Is that a factor that there are big delinquency folks that Fremont 

is such an outlier, they are one of the worst when it comes to delinquency? Is that relevant to your credit rating or should it be relevant to your credit rating? 

Ms. YOSHIZAWA. Well, I am not part of the RMBS group. 

Senator LEVIN. You are not what? 

Ms. YOSHIZAWA. I am not responsible for the RMBS area. I have 

not worked in that area. However, my understanding is that the 

originator and servicer and their collateral quality is a factor in the 

analysis, yes. 

Senator LEVIN. And should be? 

Ms. YOSHIZAWA. Yes, it should be. 

Senator LEVIN. I am glad to hear that. 

We took an in-depth look in the early hearings into home loans 

being issued by Washington Mutual, and they were riddled with 

lax lending standards, fraud, borrowers whose income had not been 


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1See Exhibit No. 95a, which appears in the Appendix on page 646. 

2See Exhibit No. 95b, which appears in the Appendix on page 647. 

verified, appraisal problems, loan errors. They had among the 

worst delinquency rates in the country right there along with Fremont. 

It seems to me it is obvious that you ought to distinguish between lenders when you do these kind of analyses, and I am glad 

that Moody’s does. I do not know if you were at the time. But it 

seems to me that it is so obvious that you should that I am just 

kind of stunned at the reluctance of S&P to just say obviously they 

ought to be a factor. But I think at the end of the eighth time I 

asked the question, I think we got the answer that it ought to be 

a factor. 

Let us take a look at, if you would, Exhibit 95. This is Delphinus. 

I am not sure what the pronunciation is of this. Exhibit 95 is a 

Moody’s deal, so I will address this to you, Ms. Yoshizawa. This 

also was rated, then downgraded within 6 months by both Moody’s 

and S&P. First, in July 2007 it was rated, then in January 2008, 

both of you downgraded it, and it became junk status. 

In Exhibit 95a,1 an investment banker wrote to a Moody’s analyst that ‘‘Delphinus was a mezzanine deal with a lot of cushion, 

so we did not really care that much.’’ That is July 2007. Well, that 

cushion obviously was not big enough. 

And then you look at Exhibit 95b,2 which is an email in August 

2007. This is an S&P analyst. He is writing the following—or she 

is writing the following: ‘‘Regarding Delphinus, it appears that the 

closing date portfolio they gave us for analysis and the effective 

date portfolio . . . were not the same. It appears that the 25ish assets that they included in our closing date portfolio that were dummies were replaced in less than 24 hours with assets that would 

have been notched and made the portfolio worse.’’ 

Why are dummies being used in this way? I think this is Exhibit 

95b, since this is a Standard & Poor’s document, I will ask you 

again, Ms. Barnes. The dummies—— 

Ms. BARNES. I am sorry. I cannot speak to the CDO practice. I 

am not in that area. 

Senator LEVIN. OK. Mr. D’Erchia, do you have an idea about the 

CDO practice? 

Mr. D’ERCHIA. No. This would be discussing the individuals on 

the new transactions side, and it would—— 

Senator LEVIN. Well, do you know anything about the use of 

these dummies generally? Have you head about that practice, substituting assets shortly before the rating comes out? Have you 

heard about that at all? You are not familiar? 

Mr. D’ERCHIA. I am not familiar with that. 

Senator LEVIN. Are you familiar with the practice, Ms. Barnes? 

Ms. BARNES. Not with respect to CDOs. 

Senator LEVIN. Do you use dummies in RMBSs? 

Ms. BARNES. Not in this manner, but at times, banks—I do recall, Mr. Chairman, where people could submit statistical pools 

that they think would be representative of the collateral that they 

would submit finally for rating. But it would not be a substitution, 


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1See Exhibit No. 1i, which appears in the Appendix on page 244. 

so to speak. It would be once the collateral was originated from a 

timing perspective. 

Senator LEVIN. All right. It would not be a substitution of one 

asset for another. 

Ms. BARNES. No. 

Senator LEVIN. OK. Do you know anything about the use of dummies, Ms. Yoshizawa? 

Ms. YOSHIZAWA. I do not. As I mentioned in my opening testimony, CDOs can either be static or managed transactions. I do not 

know about this transaction, but to the extent that it was a static 

transaction, then we would expect that the portfolio that was provided to us at closing would be the same portfolio as of the effective 

date. 

Senator LEVIN. Take a look at Exhibit 1i.1 This is what happened 

to the AAAs. We ask all of you to take a look at this. BlackRock 

Solutions made an assessment in February of this year, and they 

looked at the entire universe of AAA ratings that have been given 

to RMBS securities from 2004 to 2007. 

First, subprime RMBS securities—91 percent of the AAA ratings 

handed out in 2007 are now junk. Ninety-three percent of the AAA 

ratings in 2006 are now junk. Option ARM securities, these are securities that they looked at—we looked at these, actually, in our 

first hearing, full of negatively amortizing loans that are issued to 

borrowers with initial low interest rates but with a much higher 

loan payment that kicks in later. These are high-risk loans because 

nobody knew how many of the borrowers would default if they 

couldn’t refinance and had to pay the higher loan payments. We examined at that hearing email traffic showing that Washington Mutual wanted to sell its Option ARM loans starting in early 2007, 

because it had already decided that they were likely to fail, so they 

had better get rid of them, get them off their inventory, securitize 

them, and get them out there, put them in the stream of commerce. 

And then later, in 2007, they securitized billions of dollars of its 

Option ARM loans in several mortgage pools that resulted in dozens of securities. These pools won AAA ratings for their senior 

tranches, and this chart shows that 97 percent of the AAA ratings 

given to Option ARM securities in 2007 and 2006 have now been 

downgraded to junk status. 

The numbers for other high-risk loans on the chart are equally 

shocking. Alt–A, fixed, and variable loans, and these are the loans 

with little or no documentation, their AAA ratings have fallen to 

junk status 96 to 98 percent of the time. Prime fixed and variable 

loans are not included in the chart. 

So, does that chart shock you, to look what happened to all the 

AAA loans? Mr. D’Erchia. 

Mr. D’ERCHIA. Yes, Mr. Chairman, it does shock—it is shocking, 

98 percent, but my group would have been responsible for lowering 

these ratings, and in doing so, it is a tremendous amount of work, 

so—— 

Senator LEVIN. We will get to that. It took you quite a bit of time 

to downgrade the ratings, but we will get to that later. 

Does this shock you, Ms. Yoshizawa? 


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1See Exhibit No. 1j, which appears in the Appendix on page 245. 

Ms. YOSHIZAWA. Yes. It is certainly not what we would have expected, how our ratings would perform. 

Senator LEVIN. Now, Ms. Yoshizawa, the first panel of witnesses 

raised a lot of concerns about Moody’s handling of the CDOs, and 

here are some of the things that they said. Pressure by the investment bankers on your analysts. Pressure applied by managers at 

Moody’s to maintain market share. Over and over and over again, 

that is what we heard. Pressure to maintain market share in 

RMBs and CDOs. 

Next, managers felt like they would lose their job if they lost 

market share. Next, drive for market share led to deterioration of 

credit standards applied by Moody’s. Next, emphasis on keeping 

the investment banker customer happy, keeping them appeased. 

Next, lack of adequate resources to rate deals effectively or to rerate them effectively. Change in culture. Great importance placed 

on meeting the investment bankers’ demands. Next, the quality of 

assets assumed by Moody’s model was not the same as the collateral provided by the investment bankers. Next, bankers were aggressively pushing the CDO to get done in the summer. Well, we 

didn’t get into that one, so I won’t ask you that. 

But is all that you heard, does that trouble you? 

Ms. YOSHIZAWA. Yes, all those statements are troubling. 

Senator LEVIN. And were you surprised to hear them, or have 

you heard them before? 

Ms. YOSHIZAWA. I have heard statements such as those before, 

yes. 

Senator LEVIN. Senator Kaufman. 

Senator KAUFMAN. Thank you, Mr. Chairman. To continue the 

testimony, I would like to, just for the record, kind of go through— 

thousands of RMBSes rated AAA in 2006 and 2007 are rated now 

as junk. Ms. Barnes, can you just give me what you think are the 

one, two, or three reasons why that happened? 

Ms. BARNES. Well, Senator, the assumptions that we use in our 

criteria have obviously not panned out the way we had expected 

and the market deteriorated more precipitously and dramatically 

than we had expected. 

Senator KAUFMAN. The assumptions didn’t work out and the 

overall market went down? 

Ms. BARNES. Yes. 

Senator KAUFMAN. That is why an organization like yours, with 

a long and honorable tradition of rating AAA, all of a sudden had 

a massive failure—I think that is fair to say—and your assumptions were wrong and it was just a market thing because the housing market just went bad. Nobody could ever foresee that was 

going to happen, clearly. If you look at the housing market, it 

would seem that it was going into areas that it had never gone in 

before. I mean, there was no discussion at S&P about the fact that 

there was—I will just show this chart 1—you had a chart like this 

to describe the housing prices, that might be a factor? 

Ms. BARNES. Well, Senator, there are many assumptions that we 

use in the rating process, market value decline being one of them, 

ultimate default rates, things that impact the defaults and the seVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000072 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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verity. So in looking at how market appreciation impacts people’s 

equity positions and defaults, those would be things that we did 

consider, yes. 

Senator KAUFMAN. OK. Ms. Yoshizawa, why do you think that 

there was this thousands of RMBSes that were graded AAA that 

are now—in 2006 and 2007—rated as junk? 

Ms. YOSHIZAWA. Once again, I am not in the RMBS area. 

Senator KAUFMAN. Well, I just used that as an example—I think 

you have the flavor—— 

Ms. YOSHIZAWA. We strive for and we believe we have achieved 

historically a long history of accurate and reliable ratings. And 

even outside of those structured transactions and others that have 

been affected by the housing crisis and the knock-on effects, we 

have ratings that have performed in structured as well as other 

parts of Moody’s. I think that we certainly did not predict when we 

were rating these instruments and we were looking at the longterm credit expectations on these instruments, we did not predict 

the magnitude of the housing crisis. We did not predict the velocity 

and we did not even predict the length of time over which this crisis would extend. I think that is the main reason. 

Senator KAUFMAN. Mr. D’Erchia, do you have any opinions of 

why it happened? 

Mr. D’ERCHIA. Again, well, from a surveillance perspective, we 

had the value of seeing the actual delinquencies and we had never 

seen that precipitous a rise—— 

Senator KAUFMAN. Sure. 

Mr. D’ERCHIA [continuing]. On a comparative basis with the previous vintages in that period of time. 

Senator KAUFMAN. Yes. So this is 2006, 2007. You are doing surveillance, though. You are not really rating. You are not anywhere 

involved in the actual rating of these being AAA. You are just looking back and trying to see whether they should be re-rated or 

changed, right? 

Mr. D’ERCHIA. Yes—well, Senator, we are trying—one singular 

goal is to make sure that rating is appropriate, yes. 

Senator KAUFMAN. But in 2005, S&P was already talking about 

the deteriorating market. In your testimony on page six, you talk 

about an article entitled, ‘‘Subprime Lenders Basking in the Glow 

of a Still Benign Economy With Clouds Forming on the Horizon.’’ 

Following the internal housing market simulation conducted in 

2005, S&P had published a study concerning the potential impact 

of a housing downturn on RMBSes using the following assumptions: A January 19, 2006 article entitled, ‘‘U.S. RMBS Markets 

Still Robust But Risk Increases and Growth Drivers are Softening.’’ 

So it wasn’t like a shock. In 2005, you were already discussing 

the fact that this is a real problem. But then in 2006—and I guess 

maybe you are the wrong person—I guess I should be talking to 

you, Ms. Barnes, in terms of you are just doing surveillance. You 

are not actually doing the ratings. 

So I guess I will switch over to you, Ms. Barnes, and also just 

add to this, in your testimony, on page 11, you recount the same 

thing. So in 2005, now, you knew that there was a serious problem 

in the housing market. Take a look at that. There is the chart I 

was holding up there, which shows the fact that by 2006, we were 


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1See Exhibit No. 1j, which appears in the Appendix on page 245. 

now operating—June 2006, the housing bubble was twice the—anyway, it is just going through the roof.1 So you knew in 2005 that 

this is a really big problem, yet through 2006 and 2007, you were 

still giving AAA ratings to a whole series of RMBSes which then 

ended up being junk. 

Ms. BARNES. Yes, Senator. Through that time period, we were 

looking at the market and trying to understand the developments 

and what was happening, so the study in 2005 that you are discussing about the housing bubble, people were discussing that in 

the marketplace, so we were informing our opinions and then did 

an analysis to see what impact that would have on the ratings 

should that scenario occur. 

So from 2005 on, we were looking at the different developments, 

the different types of collateral we were seeing—— 

Senator KAUFMAN. No, I got all that, but during that period, the 

main thing that I am interested in about these instruments is you 

didn’t give them a lower rating. They still got the solid gold rating, 

which I understand, and I think it doesn’t mean what everybody 

thinks it means, which is another problem which we can talk about 

today. So you are not indicating any kind of—I am really concerned 

about this subprime market and maybe I ought to take a look and 

not give every single one of these things, or the vast majority—not 

every single one—so many AAA which then turn out being junk. 

Ms. BARNES. Well, Senator, through that time period, we did release and update our criteria—in many cases, which you would see 

that did increase our credit enhancements. So we did expect defaults and losses to occur through those periods and did increase 

our credit enhancement, which we believed at that time would be 

reflective of the ultimate exposure and default experience of those 

deals. 

Senator KAUFMAN. Ms. Yoshizawa, I know in your testimony, 

page 18, by you and Mr. McDaniel, you go back to 2003. We identified and began commenting about the loosening of underwriting 

standards starting in 2003. And that was 4 years before 2007, if 

my math is right. So there had to be some knowledge in the management of Moody’s that there is trouble here, and it didn’t all of 

a sudden happen then in 2007, there is a housing problem here of 

massive proportions and we are still rating everybody AAA—not 

everybody, excuse me. We are still putting out a good portion of 

AAA bonds, which in retrospect was just—— 

Ms. YOSHIZAWA. Our RMBS group from 2003 on, as we mentioned in the testimony—— 

Senator KAUFMAN. Sure. 

Ms. YOSHIZAWA [continuing]. Wrote about various concerns that 

they had in the market. At the same time, my understanding is 

that they were increasing enhancement levels required to get certain ratings. So there were changes being made to the methodology 

as well as requirements for reaching certain ratings. I don’t know 

about the specific practices in terms of when they took certain actions or how much enhancement they changed, for example. It was 

not my area. However, I am aware that they had been continually 

identifying and adjusting their methodology. 


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Senator KAUFMAN. Did all three of you hear the previous panel? 

Ms. YOSHIZAWA. Yes. 

Senator KAUFMAN. Were you here for the previous panel? 

Ms. BARNES. Yes, Senator. 

Mr. D’ERCHIA. Yes, Senator. 

Senator KAUFMAN. OK. Ms. Barnes, the previous panel said that 

is not it at all. The previous panel said it was lack of regulation. 

They said that there were the incentives given to folks within the 

organization. They said it was a search for profit. They said it was 

market share. Can you comment on any—I mean, did you have any 

firsthand experience of any of those things having an impact on 

what happened? Or it just didn’t happen to folks you knew? 

Ms. BARNES. Are you directing it—— 

Senator KAUFMAN. Yes. 

Ms. BARNES. Well, Senator, I have no personal knowledge of people’s incentives being directly tied to the number of deals they rate 

or rated. But overall financial performance of the organization did 

impact people’s—— 

Senator KAUFMAN. But you don’t think anybody in your organization you knew felt that the incentives distorted what decisions they 

were making? 

Ms. BARNES. Not on the deal level, no. 

Senator KAUFMAN. OK. Ms. Yoshizawa. 

Ms. YOSHIZAWA. Well, first, from the personal incentives, the analysts were not compensated based upon the performance of an individual group or—— 

Senator KAUFMAN. No, I am not talking about the analysts. I am 

talking about everybody up the chain. You just went through the 

whole thing that the analysts—when Chairman Levin mentioned 

analysts, you said, wait a minute. There is a whole process here 

that we go through. 

Ms. YOSHIZAWA. Right. 

Senator KAUFMAN. Management is involved with that, is it fair 

to say, Mr. Chairman? So we are not talking about the analysts 

now, just the analysts. We are talking about the whole chain that 

you had, that both of you went into great detail to explain how this 

works. Do you think folks in that chain felt like there were incredible incentives for them to get as many deals out the door as they 

possibly could and with the highest possible rating? 

Ms. YOSHIZAWA. I personally did not feel any undue pressure for 

market share. 

Senator KAUFMAN. All right. 

Ms. YOSHIZAWA. I had for a very long time been responsible for 

the synthetic CDO area. We had very low market share in the 20 

and 30 percent range. It was an area that I was expected to explain why our market share may have been lower in terms of our 

methodologies—— 

Senator KAUFMAN. Right. 

Ms. YOSHIZAWA [continuing]. In terms of could it be fees, but I 

was expected to know why that was the case. At no time was I told 

that my mandate was to increase that market share—— 

Senator KAUFMAN. Sure. 

Ms. YOSHIZAWA [continuing]. Or to even maintain the market 

share. 


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1See Exhibit No. 24a, which appears in the Appendix on page 318. 

Senator KAUFMAN. So you didn’t feel any pressure to increase 

business at all. So what the other panel was talking about was 

something that happened with them but didn’t happen with you? 

Everybody in the organization, that we want to be a, yes, we can 

organization, we want to expect as many deals as we can, the more 

deals the better, that happened to the folks that were on the first 

panel, but you didn’t feel—and people around you, when you went 

out to lunch, people didn’t talk about this, this pressure on us to 

do more business, to make deals work, to do whatever it took to 

make the deals work, to increase market share? You didn’t feel any 

of that? 

Ms. YOSHIZAWA. I did not feel the pressure to do deals at the cost 

of credit, not at the cost of everything else. 

Senator KAUFMAN. How about pressure just to do deals? 

Ms. YOSHIZAWA. We were expected to be able to rate the deals 

that we could rate—— 

Senator KAUFMAN. Right. 

Ms. YOSHIZAWA [continuing]. Those that we could understand or 

those that we could come up with methodologies for. 

Senator KAUFMAN. Right. 

Ms. YOSHIZAWA. We were expected to rate them at the levels that 

we thought that they should be rated. 

Senator KAUFMAN. Right. 

Ms. YOSHIZAWA. So it is not a black or white as to whether you 

can or cannot rate something. Sometimes it is. Sometimes you don’t 

have enough information. 

Senator KAUFMAN. Sure. 

Ms. YOSHIZAWA. Sometimes you think that the transaction complexity may not allow you to come up with an analysis for it a couple times—— 

Senator KAUFMAN. You were in a different environment than the 

first panel, clearly, right? 

Ms. YOSHIZAWA. I was in the same—— 

Senator KAUFMAN. No, I mean, the environment they talked 

about was something that didn’t impact on you. Didn’t they—I 

mean, you were here when they said that there were incentives—— 

Ms. YOSHIZAWA. I did hear that. I never felt that my job—— 

Senator KAUFMAN. But you never felt—I am just trying to—basically, they were working in the same company, but they were just 

seeing things differently from what you did, which is perfectly—Mr. 

D’Erchia, what do you think? 

Mr. D’ERCHIA. My plate was full. I had 100 percent market 

share. 

Senator KAUFMAN. Right. 

Mr. D’ERCHIA. My workload came from the new deal side, so that 

was a factor. I would be in a different place. 

Senator KAUFMAN. Yes. I can perceive that. 

I think, Mr. Chairman, I am going to turn it back to you. 

Senator LEVIN. Ms. Yoshizawa, take a look, if you would, at Exhibit 24a.1 It is an internal Moody’s email chain from early October 

2007. The second email is from Sunil Surana to you. Who is Sunil 

Surana, if I am pronouncing her name correctly? 


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1See Exhibit No. 5, which appears in the Appendix on page 258. 

Ms. YOSHIZAWA. Sunil was a business analyst reporting to my 

boss at that time. 

Senator LEVIN. Reporting to your boss? 

Ms. YOSHIZAWA. Yes. 

Senator LEVIN. And here is what she wrote in Exhibit 24a. ‘‘Market share,’’ and she is writing to you, ‘‘Market share by deal count 

dropped to 94%, though by volume it’s 97%. It’s lower than the 

98+% in prior quarters. Any reason for concern, are issuers being 

more selective to control costs (is Fitch cheaper?) or is it an aberration.’’ What was your answer to that? 

Ms. YOSHIZAWA. We were expected to know why we were not on 

deals that we were not on. There were multiple reasons for that. 

It could be because of price. It could be because of credit enhancement. It could be because of other relationship issues, and we 

were—— 

Senator LEVIN. So market share mattered? Isn’t that what that 

email says? 

Ms. YOSHIZAWA. Market share mattered in that we were expected to know what the story was—— 

Senator LEVIN. Yes. 

Ms. YOSHIZAWA [continuing]. And so I passed that on to my managing directors to find out. I am assuming there was a list of transactions and I was asking them to let me know what the story was 

for the transactions. 

Senator LEVIN. So market share—— 

Ms. YOSHIZAWA. There was no mandate to rate those transactions. There was no punishment for not being on those transactions. But we were expected to know why we were not on those 

transactions. 

Senator LEVIN. And so market share mattered, in a nutshell. 

Ms. YOSHIZAWA. For various reasons. 

Senator LEVIN. And to various people, higher up? 

Ms. YOSHIZAWA. Yes. They wanted to know why we were not on 

certain transactions. 

Senator LEVIN. And then if you will look at the email, Mr. 

D’Erchia and Ms. Barnes, look at Exhibit 5 talking about market 

share.1 There is an S&P email chain, March 2005, and this is an 

email from Frank Parisi to you, Ms. Barnes. Who is Mr. Parisi? 

Ms. BARNES. Oh, Frank Parisi at that time—I am trying to look 

at the time frame, because he performed different roles. 

Senator LEVIN. Oh, I see. OK. March 2005. 

Ms. BARNES. I believe he was part of our research group at that 

time—— 

Senator LEVIN. OK. Here is what he had to say. He said, ‘‘When 

we reviewed the 6.0 results a year ago, we saw the sub-prime and 

the Alt–A numbers going up and that was a major point of contention which led to all the model tweaking we’ve done since. Version 

6.0 could’ve been released months ago and resources assigned elsewhere if ’’—and listen to this—‘‘we didn’t have to massage the subprime and Alt–A numbers to preserve market share.’’ Market share 

mattered to him, wouldn’t you agree, Ms. Barnes? 


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Ms. BARNES. Mr. Chairman, I would say yes. He was saying that 

was a point he believed was being considered for the implementation of the model at that time. 

Senator LEVIN. Yes. It mattered. Preserving market share 

mattered, isn’t that what he is saying, point blank? 

Ms. BARNES. He is saying that was his interpretation, yes, Mr. 

Chairman. Could I clarify for—— 

Senator LEVIN. Well, you can try to clarify. I am just reading the 

words. It says here something could have been released months 

ago, which should have been released months ago, and resources 

assigned elsewhere if that had happened, ‘‘if we didn’t have to massage the subprime and Alt–A numbers to preserve market share.’’ 

Isn’t that pretty clear? 

Ms. BARNES. Right. Well, I guess there are two points I would 

make related to this. I mean, one, there are people with a client 

focus on the email and market share would have an impact in relation to them. But also, from a—— 

Senator LEVIN. It mattered to them. 

Ms. BARNES. Yes. 

Senator LEVIN. And that was transmitted, was it not, to the 

staff? 

Ms. BARNES. This email is to the analytic managers of the mortgage group. 

Senator LEVIN. Yes, to the analysts. It was transmitted to the 

analysts that market share was important. 

Ms. BARNES. It was a factor at that time for people to consider, 

yes, Mr. Chairman. 

Senator LEVIN. OK. How about you, Mr. D’Erchia. Pretty clear? 

Mr. D’ERCHIA. Well, I am reading the words and I can’t pretend 

to know what Frank is thinking when he is saying this. 

Senator LEVIN. Well, just about what he is saying. Forget what 

he is thinking. 

Mr. D’ERCHIA. Well, the words itself, I mean—— 

Senator LEVIN. Pretty clear, aren’t they? 

Mr. D’ERCHIA. You just repeated them—— 

Senator LEVIN. Would you say they are pretty clear? 

Mr. D’ERCHIA. With the caveat that I don’t know what he is 

thinking when he says it. But just the words themselves, yes, they 

are clear. 

Senator LEVIN. We heard from Mr. Michalek this morning, Ms. 

Yoshizawa, that there was a dramatic change in culture at Moody’s 

led by Brian Clarkson, and that Moody’s moved away from a more 

analytical, academic environment to an environment which is 

aimed more at satisfying the investment bankers who are paying 

Moody’s for the ratings. Did you hear that testimony? 

Ms. YOSHIZAWA. I did. 

Senator LEVIN. Did that trouble you? 

Ms. YOSHIZAWA. It troubled me that was his view, yes. 

Senator LEVIN. And he testified that some of the bankers had 

complained to Brian Clarkson that Mr. Michalek was asking too 

many questions, he was doing too thorough of a review. They wanted him removed from their deal reviews, and they got their wish. 

Did you hear that? 


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Ms. YOSHIZAWA. I don’t think I heard him say that they got their 

wish. 

Senator LEVIN. Well, he said that he was not with two banks. He 

was taken off the case, right? 

Ms. YOSHIZAWA. I don’t know of a case where he was, no. 

Senator LEVIN. You didn’t hear him say that he was no longer 

allowed to work with a couple banks? 

Ms. YOSHIZAWA. No. In fact, to my knowledge, he worked with 

at least one of those banks that I know of—— 

Senator LEVIN. But did you hear him say that he was taken off 

the case with those two banks, taken off the client list with those 

two banks? 

Ms. YOSHIZAWA. I did listen to his testimony. I don’t recall—— 

Senator LEVIN. No, I am saying, did you hear him testify—— 

Ms. YOSHIZAWA. I did hear him testify—— 

Senator LEVIN. And was it true that he was, in fact, told not to 

work with one or more banks? 

Ms. YOSHIZAWA. I am not aware of that. 

Senator LEVIN. Were you there at the time? 

Ms. YOSHIZAWA. I was there at the time. 

Senator LEVIN. OK. So you were not aware that he was restricted in any way from working on CDO deals with certain 

banks? You were not aware of that? 

Ms. YOSHIZAWA. I was not aware of that, no. We had a quite contentious relationship with most of the investment banks that were 

out there, and there were many times that we would be requested 

either to remove an analyst from a transaction or that they not be 

put on the next transaction because it was that contentious relationship. That happened quite commonly. We did not make it a 

practice to remove people from transactions. 

Senator LEVIN. Did you ever do that? Did you ever remove a person from transactions with particular banks because of complaints 

from that bank? 

Ms. YOSHIZAWA. Not because of the complaints, because of timing, because of—— 

Senator LEVIN. Following conversations with banks—where they 

asked for the removal of somebody from the relationship, did you 

ever accommodate that? 

Ms. YOSHIZAWA. There would be cases where they would ask, because the timing that the analyst told them that they needed in 

order to be able to work on a transaction, because their plate was 

full or because they had other things on their transaction, that at 

that time that I would say that I would see if I could get somebody 

else on the transaction. 

Senator LEVIN. It was only a complaint that the analyst was not 

moving quickly enough? 

Ms. YOSHIZAWA. No, it would be because they were not able to 

start or work on the transaction, so—— 

Senator LEVIN. And that complaint came from the banks? 

Ms. YOSHIZAWA. It could come from—it usually would come from 

the banks. However, it could also come from the analyst who comes 

back and says, I have a vacation or I have a conflict in terms of 

my time and so I would not be able to work on this transaction. 


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Senator LEVIN. But you never heard from a bank that they really 

would prefer you to remove somebody, it is just not working out 

well with that person? It always related just to the person not having enough time? 

Ms. YOSHIZAWA. No, we did get complaints from banks that they 

wanted people removed because they were unhappy with the—— 

Senator LEVIN. But you never accommodated that? 

Ms. YOSHIZAWA. No, we did not. We may add other people to the 

transaction. However, we would emphasize that the decisions were 

made on a committee basis, and so we would keep that analyst on. 

I may go to the analyst to find out what the issues were. However, 

I do not remember an instance where I took somebody off because 

the bank complained about their performance or because they were 

upset about some of the things that they may have said. 

Senator LEVIN. And you are telling us under oath that you never 

removed somebody because of a conflict between that person and 

the bank? 

Ms. YOSHIZAWA. I cannot remember an instance where I did. 

Senator LEVIN. You don’t remember? So you are not denying that 

happened, is that correct? 

Ms. YOSHIZAWA. I cannot remember an instance where I did that. 

Senator LEVIN. How about personality conflict? 

Ms. YOSHIZAWA. There were cases where transactions would 

occur—as I mentioned, a lot of transactions could be very contentious. We typically had a couple of analysts who would work on 

transactions with us or arrangers so that they understood the 

transactions. But sometimes those relationships could get very contentious and very abusive and so sometimes for the next transaction, I would not put them on it, both from the perspective of protecting the analyst, because sometimes, as I said, the relationships 

could get very contentious and very abusive and—— 

Senator LEVIN. So it wasn’t just a matter of there wasn’t adequate time. Now you are protecting the analyst from abuse, is that 

it? 

Ms. YOSHIZAWA. To the extent that we thought that the discussions could get very—if somebody was being yelled at or if we 

thought that the discussions were getting very aggressive, it was 

a very difficult situation, and so we did not necessarily want to put 

them on the next transaction or—— 

Senator LEVIN. Or if the bank got mad enough at an analyst and 

it was contentious enough, then you might tell the analyst, we are 

removing you for your own sake. 

Ms. YOSHIZAWA. Not during a transaction. It would be for the 

next transaction—— 

Senator LEVIN. Yes, for the next transaction with that bank. We 

are removing you for your own sake. 

Ms. YOSHIZAWA. We could do that. In other cases, I have brought 

in more senior people into the transaction. 

Senator LEVIN. Yes, but you could removed analysts. You might 

have remove analysts for that reason. 

Ms. YOSHIZAWA. Not removing them from the transaction—— 

Senator LEVIN. No, from the next transaction with that bank. 

Ms. YOSHIZAWA. We may assign it to another person. 

Senator LEVIN. Yes. 


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Ms. YOSHIZAWA. We didn’t necessarily have the same analysts 

working on every transaction—— 

Senator LEVIN. Right, but you may have decided not to put that 

analyst with a particular bank because there was that kind of a 

personality conflict. 

Ms. YOSHIZAWA. That could be the case, yes. 

Senator LEVIN. That, you do remember? 

Ms. YOSHIZAWA. Yes. 

Senator LEVIN. Why would you not just tell the banker, knock it 

off? 

Ms. YOSHIZAWA. We did. 

Senator LEVIN. So you stopped your relationship with bankers—— 

Ms. YOSHIZAWA. We would—— 

Senator LEVIN [continuing]. Based on their abuse? 

Ms. YOSHIZAWA. We would ask them to knock off the—— 

Senator LEVIN. Did you ever tell them, we are not going to do 

any more credit rating for you with this kind of abuse of our analysts? 

Ms. YOSHIZAWA. I do not remember whether we did. I don’t think 

we did. 

Senator LEVIN. Would you consider that pressure from banks? 

Ms. YOSHIZAWA. There was always pressure from the banks. 

Senator LEVIN. That type of pressure, to remove analysts? 

Ms. YOSHIZAWA. There was always pressure from banks, including—— 

Senator LEVIN. Including that? 

Ms. YOSHIZAWA. Including that type of pressure, yes. It was our 

job as managing directors to push back against that. 

Senator LEVIN. I want to let you know, in your testimony you are 

shifting around here a little bit. I want to let you know that. First, 

you were saying you only would do it because of time, that you only 

would not have somebody assigned to a particular bank. Then you 

are saying, well, you didn’t remember. Now you are saying that, 

yes, you might have not assigned a particular analyst to a particular bank in the next transaction because of that kind of heated 

conflict between the two. So I just want to let you know the way 

your testimony comes across. It is very unsatisfactory and—— 

Ms. YOSHIZAWA. If I can clarify, there—— 

Senator LEVIN. Sure. 

Ms. YOSHIZAWA. To me, when you say ‘‘remove,’’ I think of removing—— 

Senator LEVIN. That you did not assign somebody to that bank 

for the next transaction because of that conflict. 

Who are you talking to here? 

Ms. YOSHIZAWA. I am sorry. It is our legal—— 

Mr. ROSS. I am her counsel and I am handing her a note, just 

like your counsel handed you a note. 

Senator LEVIN. I just want to know who. 

Mr. ROSS. I am Stephen Ross from Akin Gump. 

Senator LEVIN. Thank you. 

Mr. ROSS. Thank you. 


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1See Exhibit No. 24b, which appears in the Appendix on page 319. 

Ms. YOSHIZAWA. I am sorry. I just wanted to clarify the difference between removing someone in the middle of a transaction—— 

Senator LEVIN. I understand. 

Ms. YOSHIZAWA [continuing]. Because we were being—versus assigning somebody to the next transaction—— 

Senator LEVIN. OK. You did not assign that person to a particular bank for the next transaction because of that conflict. 

Ms. YOSHIZAWA. Because there could be—because of the conflict 

or what happened during that in terms of the relationship. 

Senator LEVIN. All right. 

Ms. YOSHIZAWA. However, I wanted to make clear—— 

Senator LEVIN. The bank got their way. Don’t assign that person 

to me from now on. The bank got their way for the next transaction. 

Ms. YOSHIZAWA. I think that was something that was asked of 

us quite often—— 

Senator LEVIN. And you sometimes did it. 

Ms. YOSHIZAWA [continuing]. It would depend on how we felt 

about how that analyst—— 

Senator LEVIN. Right. 

Ms. YOSHIZAWA [continuing]. Felt about that—the pressure and 

the relationship. 

Senator LEVIN. And you sometimes then did what the bank 

asked you to do, which is not to assign that person for the next 

transaction. 

Ms. YOSHIZAWA. Not for the benefit of the bank, no. It was for 

the benefit of—because we felt that our analysts were being abused 

and we did not want that to happen. We want to have—we may 

have assigned a more senior person that we felt could push back 

better. 

Senator LEVIN. And the bank got their way, though. That person 

would not have been assigned to the next transaction. So they succeeded. 

Ms. YOSHIZAWA. They may have succeeded in that instance, but 

it was not a practice and it was not for their benefit. 

Senator LEVIN. There was at Moody’s, I believe—a man named 

Andy Kimball, is that correct? 

Ms. YOSHIZAWA. Yes. 

Senator LEVIN. Does that strike a bell? If you would take a look 

at Exhibit 24b,1 this is attached to the cover sheet from Mr. 

McDaniel to himself for his file. This is a long memo about credit 

policy issues at Moody’s. It looks like it came at about October 

2007, Exhibit 24b. We understand this is a memo that Mr. Kimball 

wrote. Are you familiar with this? 

Ms. YOSHIZAWA. I am not. 

Senator LEVIN. You are not? OK. 

Ms. Yoshizawa, we were advised by Moody’s Chief Credit Officer 

that it was common knowledge that ratings shopping occurred in 

structured finance. In other words, investment bankers sought ratings from credit rating agencies who would give them their highest 

ratings. Would you agree with that? 


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1See Exhibit No. 5, which appears in the Appendix on page 258. 

2See Exhibit No. 45, which appears in the Appendix on page 383. 

Ms. YOSHIZAWA. I agree that credit shopping does exist, yes. 

Senator LEVIN. Ms. Barnes, would you agree that the same thing 

existed in your area? 

Ms. BARNES. Yes, Mr. Chairman. 

Senator LEVIN. And Mr. D’Erchia? 

Mr. D’ERCHIA. No. There would be no reason to shop—— 

Senator LEVIN. OK. So because you were doing surveillance, 

right, it would not be applicable. 

Mr. D’ERCHIA. That is correct. 

Senator LEVIN. OK. Mr. D’Erchia, whenever S&P made a criteria 

change to its RMBS model and that change was more conservative 

than the previous model, did S&P retest the old deals to see if their 

structure still passed for rating purposes? 

Mr. D’ERCHIA. Traditionally, no. 

Senator LEVIN. And if you would take a look at that exhibit we 

talked about before, Exhibit 5,1 this is a March 2005 memo. I don’t 

think I asked you about this memo. I think I talked to Ms. Barnes 

about it. Are you familiar with this email? 

Mr. D’ERCHIA. Well, not really, Senator. I am just reading it now 

with you. 

Senator LEVIN. OK. Well, let me read it. ‘‘When we first reviewed 

6.0 results a year ago, we saw the sub-prime and Alt–A numbers 

going up and that was a major point of contention which led to all 

the model tweaking we’ve done since. Version 6.0 could’ve been released months ago and resources assigned elsewhere if we didn’t 

have to massage the sub-prime and Alt–A numbers to preserve 

market share.’’ Are you familiar with Version 6.0? 

Mr. D’ERCHIA. Not really, Mr. Chairman. 

Senator LEVIN. OK. That was not something that you had any 

dealings with? 

Mr. D’ERCHIA. The situation is different on the new deal side. 

They are rating a transaction by looking at certain information and 

making projections and assumptions. I had the luxury of getting 

monthly runs and seeing what the actual delinquencies were—— 

Senator LEVIN. All right. 

Mr. D’ERCHIA [continuing]. And so I could measure against the 

actual information. 

Senator LEVIN. So this was not relevant to your work doing the 

surveillance? 

Mr. D’ERCHIA. I wouldn’t say that. There is certain information 

you can get when you are doing new transactions that you just 

don’t have once the transaction has been issued. A FICO score, you 

would get from the banker, I would assume, on the deal side, which 

I couldn’t get current consistently. It was a difficult thing to get on 

a regular basis. If the home was sold and refinanced, it was very 

difficult to get current loan-to-value information, and the like. 

Senator LEVIN. OK. Ms. Barnes, if you would take a look at Exhibit 45,2 please. This was an email sent to you in June 2005. This 

is a mortgage broker who was writing you saying, ‘‘I saw you today 

on CNBC and the reason for my email is that I am extremely 

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ed.’’ This is now June 2005. ‘‘I have been a mortgage broker for the 

past 13 years and I have never seen such a lack of attention to loan 

risk. I am confident our present housing bubble is not from supply 

and demand of housing, but from money supply.’’ 

‘‘In my professional opinion the biggest perpetrator is Washington Mutual.’’ And then listing what Washington Mutual was all 

about—‘‘no income documentation loans;’’ ‘‘Option ARMs, negative 

amortization on over-leveraged collateral;’’ ‘‘Interest income on negative amortization is not taxed,’’ going down to 2C, or 3, ‘‘Option 

ARMs make up 90% of Bay Area loans in California.’’ ‘‘4, ‘‘WaMu’s 

recent bid for Providian is the purchase of another highly leveraged/securitized bank.’’ 5, ‘‘100% financing loans. I have seen instances where WaMu approved buyers for purchase loans; where 

the fully indexed interest only payments represented . . .’’—these 

are interest only payments—‘‘100% of the borrower’s gross monthly 

income. We need to put a stop to this madness!!!’’ 

Did you know the person who wrote about that madness, Michael 

Blomquist? Did you know that person? 

Ms. BARNES. No, not that I recall. 

Senator LEVIN. This was just an email that you got from somebody? 

Ms. BARNES. I believe so. Yes, sir. 

Senator LEVIN. All right. He sure put his finger on WaMu. 

So S&P, you raised credit protection for investment grade RMBS 

securities because of issues that were raised like this, however, is 

that correct? Did you not—— 

Ms. BARNES. Yes, we did, sir—— 

Senator LEVIN. You did? 

Ms. BARNES. In the middle of 2005, what precipitated my appearance on CNBC was that we increased our credit enhancement requirements for the Option ARM loans. 

Senator LEVIN. All right. And so you also had data showing that 

the subprime was not performing in the first part of 2006, as well, 

is that correct? 

Ms. BARNES. It started to perform a little differently, but from 

a delinquency perspective. 

Senator LEVIN. That meaning worse? 

Ms. BARNES. Worse, yes, sir. 

Senator LEVIN. Now, these were some of the factors that led to 

a major model change to levels in July 2006. According to the testimony, I believe, that you gave to the Senate Banking Committee 

in April 2007, this model change resulted in more protection 

against loss, so-called credit enhancements. ‘‘They were increased 

by 50 percent in the average subprime ratings as compared to 

deals rated in the first half of 2006 and during 2005.’’ Is that correct? 

Ms. BARNES. Yes, it is, Mr. Chairman. 

Senator LEVIN. And, Ms. Yoshizawa, Moody’s also increased its 

credit enhancement for its model by 30 percent during that time 

frame, is that correct? 

Ms. YOSHIZAWA. I don’t know about the RMBS model, sir. 

Senator LEVIN. OK. But your model that you were using, was 

that increased by 30 percent? 


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1See Exhibit No. 62, which appears in the Appendix on page 471. 

Ms. YOSHIZAWA. I am not aware of how the RMBS model was 

changed. 

Senator LEVIN. OK. Let me go back, then, to you, Ms. Barnes. 

The model changes to Levels was finalized in July 2006. You had 

better data. You had improved assumptions about how subprime 

would behave in the future and that would allow you to better predict how deals would behave. It was a better model than the previous model. If you had used the new model to reevaluate existing 

RMBS securities, it would have resulted in downgrades for many 

of those securities, is that correct? If you had used that model? 

Ms. BARNES. If we had used that model at that time? 

Senator LEVIN. Yes. It would have resulted in downgrades for 

many of the RMBS securities. 

Ms. BARNES. Well, if we had rated them at the point of issuance, 

it would have ended up with different ratings being issued at that 

time, yes. 

Senator LEVIN. OK. 

Ms. BARNES. Possibly. 

Senator LEVIN. Mr. Barnes, your company did not use that revised model to reevaluate the existing RMBS securities, is that correct? 

Ms. BARNES. I am sorry. I didn’t understand your question. 

Senator LEVIN. You did not use this revised model to reevaluate 

existing RMBS securities, is that correct? 

Ms. BARNES. We did not, Mr. Chairman. 

Senator LEVIN. Even though those were all under surveillance, is 

that correct? 

Ms. BARNES. That is correct. 

Senator LEVIN. OK. And were you familiar with that decision, 

Mr. D’Erchia? 

Mr. D’ERCHIA. Yes. As I said, Mr. Chairman, we had the luxury, 

if you will, of receiving the current information on a monthly basis. 

Senator LEVIN. Right. And you did not have resources, as well, 

is that correct, to apply those revised models to reevaluate all the 

existing RMBS securities? It was also a resource issue, is that correct? 

Mr. D’ERCHIA. No, Mr. Chairman. 

Senator LEVIN. That is not correct? It was not a resource issue? 

Mr. D’ERCHIA. No. Having the ability to look at the actual delinquencies and monitor them to see what percentage, if any, turn 

into losses was something that I didn’t have to be predictive. I can 

see what was happening. 

Senator LEVIN. OK. Now, take a look at Exhibit 62.1 At the top 

of page two, this is a Standard and Poor’s memo from Roy Chun, 

is that correct? 

Mr. D’ERCHIA. Yes. 

Senator LEVIN. Did you ever see this memo before, or this email 

before? Disseminated to surveillance—— 

Mr. D’ERCHIA. I haven’t seen it since 2005. 

Senator LEVIN. OK. ‘‘How do we handle existing deals especially 

if there are material changes that can cause existing ratings to 

change?’’ Who is Mr. Chun again? 


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1See Exhibit No. 86, which appears in the Appendix on page 531. 

Mr. D’ERCHIA. Mr. Chun worked in the surveillance group and 

reported to me. 

Senator LEVIN. All right. ‘‘How do we change existing deals . . . 

if there are material changes that can cause existing ratings to 

change? I think the history has been to only re-review a deal under 

new assumptions . . . when the deal is flagged for some performance reason.’’ And then he said, ‘‘I do not know of a situation where 

there were wholesale changes to existing ratings when the primary 

group changed assumptions or even instituted new criteria. The 

two major reasons why we have taken the approach is, (i), lack of 

sufficient personnel resources.’’ That wasn’t the reason? What he 

said was the reason, one of two, is not the reason, lack of personnel 

resources? 

Mr. D’ERCHIA. Mr. Chairman, I can’t speak to the specifics—— 

Senator LEVIN. No, but you disagree with that, is that correct? 

That was not a reason why that new model was not applied to the 

existing deal. 

Mr. D’ERCHIA. In 2005, I did not know that resources was—— 

Senator LEVIN. Did you ever have a problem in existing resources 

when it came to your job of surveillance? Did you ever raise the 

issue? 

Mr. D’ERCHIA. Oh, yes—— 

Senator LEVIN. You needed more resources? 

Mr. D’ERCHIA. Yes, I did. 

Senator LEVIN. OK. Tell us about that. 

Mr. D’ERCHIA. Well, when we started to see the increased delinquencies, we switched to doing vintage reviews on the 2006 and 

2007 transactions. We worked in conjunction with a number of people throughout the organization, criteria, data, management, the 

new deal side, and also in New York. I had the luxury, if you will, 

again, it was moving targets with attrition and new hires and terminations, etc., anywhere from 100 to 125 people reporting to me 

in New York. So when I would have a particular area that needed 

additional resources, I would shift people around to cover that. At 

the same time, I would make requests for additional resources for 

the future so that I could adequately cover all of our workload. 

Senator LEVIN. Right. And you didn’t get those resources, did 

you? 

Mr. D’ERCHIA. I got resources. 

Senator LEVIN. Were they adequate to do your job? 

Mr. D’ERCHIA. I would say they were adequate to do the job at 

the time it needed to be done. 

Senator LEVIN. Take a look at Exhibit 86,1 if you would. Who 

was Ernestine Warner? 

Mr. D’ERCHIA. Ernestine Warner was the head of the RMBS surveillance area. 

Senator LEVIN. And she was asking for help? 

Mr. D’ERCHIA. She is asking for resources. 

Senator LEVIN. Yes. And you told her, I believe, is it not true, 

that they would be coming later on? 

Mr. D’ERCHIA. Well, I was identifying a potential avenue where 

we can get additional resources. 


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Senator LEVIN. She was asking for additional resources, was she 

not? 

Mr. D’ERCHIA. Yes. 

Senator LEVIN. To do the surveillance job, and right in the middle of that Exhibit 86, you write, ‘‘[Y]ou should be getting 4 or 5 

new Associates from the 2007 Associate class for 12 and continuing 

to get them going forward. That might help.’’ Her response, I believe, was at the top—— 

Mr. D’ERCHIA. That is right. 

Senator LEVIN. ‘‘They will be a great help but they . . .’’—and 

this is February 2007, this is a critical time—‘‘They will be a great 

help but they will not start until August, right?’’ So she needs help 

now, she is telling you, and now being February, and you are telling her she will get a few in August. And then she says, ‘‘Let’s talk 

about anything we might be able to do in the interim. I talked to 

Tommy yesterday and he thinks that the ratings are not going to 

hold through 2007.’’ Your ratings, your surveillance, you are supposed to make sure those ratings stay. 

Mr. D’ERCHIA. Yes, sir. 

Senator LEVIN. And she has talked to Tommy—I am not sure 

who that is—but he thinks the ratings are not going to hold 

through 2007. ‘‘He asked me to begin discussing taking rating actions earlier on the poor performing deals. I have been thinking 

about this for much of the night. We do not have the resources to 

support what we are doing now.’’ 

You kept saying to my questions, you thought the resources were 

adequate now. But she is telling you, we do not have resources to 

support what we are doing now. A new process without the right 

support would be overwhelming. What was your response? 

Mr. D’ERCHIA. Oh, my response was to request resources, but 

here is—— 

Senator LEVIN. Did you get them? 

Mr. D’ERCHIA. I got some, as I said—— 

Senator LEVIN. Did you get what you needed? 

Mr. D’ERCHIA. Well, it depends on the job. On this particular job, 

I feel we were adequately covered and I think that was—— 

Senator LEVIN. Were there some jobs you weren’t adequately covered? In your judgment then? 

Mr. D’ERCHIA. I would triage according to volatility. 

Senator LEVIN. Triage? That means something was being shorted. That is the meaning of triage. If you have two sick patients, 

you are going to deal with the one that can live. I mean, come on. 

Triage means you were not providing adequate resources where 

they were needed. 

Mr. D’ERCHIA. Well, if I could, Mr. Chairman—— 

Senator LEVIN. Sure. Go ahead. 

Mr. D’ERCHIA. Ernestine Warner is in charge of the Residential 

Mortgage Group. Her job is to inform me when she needs resources 

and what those resources are. This email is her doing her job. 

Senator LEVIN. Right. 

Mr. D’ERCHIA. What I am doing is trying to address that request. 

I am looking to move the entire associate class over. I understand 

we are talking February to August, and she is asking about the interim. The ‘‘Tommy’’ she is referring to is the head of the Criteria 


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1See Exhibit No. 84, which appears in the Appendix on page 526. 

Group. In the interim, I am looking for help. I am also shifting people over from other areas where they can help support me. This is 

in addition to and including the data area and the deal side if there 

was the luxury of people available, because to go out and hire, you 

are looking at at least a 6-month learning curve but she needs the 

help now. And so I had to address this situation at that time by 

shifting people over and making sure that we can help now. 

Senator LEVIN. Did she get the resources that she needed when 

she needed them? 

Mr. D’ERCHIA. I think, sadly enough, your chart shows that with 

the amount of downgrades that we had to do to make that rating, 

to make the ratings be appropriate—and at that particular time, 

I would say I was never satisfied with anything, and that typically 

was the budget process, is where I would go and I would request 

and document the need for those requests and then we would get 

them. But at this particular time, and knowing what I did in shifting over personnel, this particular issue, yes, this was resolved. 

Senator LEVIN. It was resolved. Were the resources adequate? 

She was warning you, the storm is coming. The ratings aren’t going 

to hold. You are going to need to start downgrading. We need people. We need resources now. And you are telling me she got the resources that she needed? That is what your testimony is, under 

oath? 

Mr. D’ERCHIA. Yes. We increased our staff—as I said, I had 

about 100—over 115 people to 125 people at any given time. 

Senator LEVIN. All right. Now take a look at Exhibit 84,1 if you 

would, the third page. This is Ernestine Warner again writing. ‘‘In 

light of the current state of residential mortgage performance, especially sub-prime, I think it would be very beneficial for the 

RMBS surveillance team to have the work being done by the temps 

to continue. It is still very important that performance data is loaded on a timely basis as this has an impact on our exception reports. 

Currently, there are nearly 1,000 deals with data loads aged beyond one month.’’ Was that satisfactory, to have that kind of a 

backlog? 

Mr. D’ERCHIA. No, and that is what we did. Also, we used—for 

data loading and data collection, I would in addition use our affiliate company—CRISIL—and have them do a lot of the data loading 

and data collection. The people she is talking to are people in the 

data group, and she is seeking additional help in loading data. 

Senator LEVIN. And, Ms. Barnes, you had to borrow staff for new 

ratings, I understand, from surveillance, is that correct? 

Ms. BARNES. Yes, Mr. Chairman. At different times, we shifted 

resources between the two. 

Senator LEVIN. How about at that time, at that time that we are 

talking about? 

Ms. BARNES. In December 2006? 

Senator LEVIN. Yes. 

Ms. BARNES. I don’t think so in December 2006, but in February, 

we were working jointly. 


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Senator LEVIN. Jointly, but you were short of staff at the same 

time they were short of staff, is that correct? You were both short 

of staff? 

Ms. BARNES. Yes, Mr. Chairman. Everyone was working very 

hard and—— 

Senator LEVIN. I know everyone was working hard. Were you 

both short of staff? 

Ms. BARNES. Right. As a manager, you are always asking for 

more resources to do more things—— 

Senator LEVIN. This is just a routine time, right? 

Ms. BARNES. Right. 

Senator LEVIN. This was all routine. 

Ms. BARNES. No, not at all. 

Senator LEVIN. There wasn’t a collapse, or a calamity that was 

about to hit us. It was just ordinary, bureaucratic, everyone can always use more staff. Everybody is working pretty hard. You needed 

more staff. You saw something coming, didn’t you? 

Mr. D’ERCHIA. Yes. 

Senator LEVIN. And didn’t you also need more staff, and didn’t 

you make requests for more staff? Didn’t you have to pull staff 

from other parts of the operation? 

Ms. BARNES. Yes, we did, Mr. Chairman. 

Senator LEVIN. February 2007, we need to talk about getting 

more resources in general. I see evidence that I really need to add 

staff to keep up what is going on with subprime and mortgage performance in general. And the company was doing well, wasn’t it, 

pretty well profit-wise at this time, S&P at that time? 

Ms. BARNES. I can’t speak to the financial performance. 

Senator LEVIN. Can you speak to that? 

Mr. D’ERCHIA. No. We, as I said, had our hands full with monitoring delinquencies to see if they would lead to realized losses. 

Senator LEVIN. And in 2006, delinquency rates for loans supporting subprime securities were hitting record levels, is that true, 

Mr. D’Erchia? 

Mr. D’ERCHIA. In 2006, yes. 

Senator LEVIN. And they outpaced any previous year for subprime RMBSes, is that correct? 

Mr. D’ERCHIA. To my knowledge, yes, Mr. Chairman. 

Senator LEVIN. And by the end of 2006, delinquencies in the 

high-risk subprime securities, RMBS securities, were approaching 

10 percent and the vintage was not even a year old, is that correct? 

Mr. D’ERCHIA. The specific numbers sound correct. 

Senator LEVIN. There were a lot of reasons for the 2006 loans 

that were going bad so quickly. Fraud in mortgage applications was 

up substantially. Low and no doc loans were prevalent. stated income loans, in which a bank doesn’t verify the borrower’s income, 

were everywhere. Combined loan-to-value was pushing 90 percent 

for subprime. Housing prices had peaked and were beginning to 

fall, making refinancing difficult. Is it correct that by late 2006, 

that you were of the opinion that subprime was rapidly deteriorating? Is that correct, Ms. Barnes? 

Ms. BARNES. I am sorry, which month? 

Senator LEVIN. What time? 

Ms. BARNES. I am sorry, I didn’t catch the last part of your—— 


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Senator LEVIN. Is it correct that by late 2006, you were of the 

opinion that subprime was rapidly deteriorating? 

Ms. BARNES. I would say it was deteriorating at a pace that was 

higher than the previous vintages, yes. 

Mr. D’ERCHIA. Yes, I agree. 

Senator LEVIN. How about you, Ms. Yoshizawa? 

Ms. YOSHIZAWA. I think our RMBS group was publishing that it 

was higher than previous vintages, but it was still tracking with 

some of the previous downturn years. 

Senator LEVIN. OK. In late 2006, I believe that Standard and 

Poor’s advised the head of structured finance was a person named 

Joanne Rose? 

Ms. BARNES. Yes, it was, sir. 

Senator LEVIN. That subprime was rapidly deteriorating and that 

you felt that Standard and Poor’s should start downgrading 

subprime, is that correct? 

Mr. D’ERCHIA. We were downgrading subprime. 

Senator LEVIN. So that you felt Standard and Poor’s should 

downgrade subprime, significantly. 

Mr. D’ERCHIA. At this time period. 

Senator LEVIN. Yes. 

Mr. D’ERCHIA. Yes. 

Senator LEVIN. And you continued to bring that up in 2007, is 

that correct? 

Mr. D’ERCHIA. Your charts show—— 

Senator LEVIN. And was she resistant at all? 

Mr. D’ERCHIA. I wouldn’t say resisted. She would want us to 

work more in conjunction with the deal side and others, including 

Frank and our research and our criteria groups, in order to ascertain whether or not we are seeing an anomaly where the delinquencies are front-end loaded, and the reality over the life of the 

transaction, if that became true, then we wouldn’t be seeing such 

large losses and downgrades. When it became apparent that those 

losses were being realized, yes, we made those ratings appropriate. 

Senator LEVIN. Yes. But you had kind of a bone of contention, 

was there not, between you and Joanne Rose? Isn’t that a fair 

statement? There was a disagreement between you and Joanne 

Rose on this issue, was there not? I mean, people have disagreements. Was there a disagreement about this issue? 

Mr. D’ERCHIA. About this issue? 

Senator LEVIN. Yes. 

Mr. D’ERCHIA. Yes. 

Senator LEVIN. OK. And as a matter of fact, it became such a 

bone of contention that she gave you a bad performance evaluation, 

didn’t she? You had strong convictions on this subject, about the 

rapid deterioration of subprime mortgages and the need to downgrade, is that not true? 

Mr. D’ERCHIA. Yes, but it wasn’t clear to me that the evaluation 

was personal issues or related to this issue. 

Senator LEVIN. But it may have been related to this issue, is that 

what you are saying? It wasn’t clear to you—— 

Mr. D’ERCHIA. It wasn’t clear to me why she wrote that. 

Senator LEVIN. All right. It followed, however, some continued 

disagreements about the issue of the rapid deterioration of the 


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subprime mortgages and the need to downgrade. Is that fair, that 

bad performance evaluation came at that time? 

Mr. D’ERCHIA. I guess I am not clear on what the exact question 

is. 

Senator LEVIN. You made a comment about her evaluation, I believe, is that not true—— 

Mr. D’ERCHIA. My evaluation. 

Senator LEVIN. Yes. 

Mr. D’ERCHIA. Yes. 

Senator LEVIN. Of you. 

Mr. D’ERCHIA. I responded. 

Senator LEVIN. Who evaluated you? 

Mr. D’ERCHIA. Who evaluated me? 

Senator LEVIN. Was she evaluating you? 

Mr. D’ERCHIA. She wrote that evaluation. 

Senator LEVIN. That is what I am saying. And you had previously had a disagreement with her about the issue of downgrading subprime mortgages and the rapid deterioration, in your 

judgment, which was occurring, and she and you had a disagreement about that, and you have acknowledged that you did have a 

disagreement. Did you not write in your comment about her evaluation that you had a disagreement over subprime debt deterioration? Did you not write that in your reaction? 

Mr. D’ERCHIA. Yes, Mr. Chairman. 

Senator LEVIN. OK. The bottom line is that the credit rating 

agencies continued to issue AAA ratings on new subprime RMBS 

and CDOs in 2007 despite warnings, despite a large percentage of 

the 2007 vintage turning out to be problematic and downgraded, 

and it is a pretty sad story. A sad chapter in the history of credit 

rating agencies, folks. People put a lot of reliance, maybe too much 

reliance, on what you do, but that is a fact and it is no longer as 

much of a fact as it was a couple of years ago and there was a real 

failure here. 

How we deal with it, we will know in the next few weeks. There 

are some structural problems here in terms of conflict of interest, 

but there are some other issues, as well. We, I think, see some of 

it in the history which are in these exhibits. As much as exhibits 

can come to life, these problems are coming to life. 

I thank you all. 

Mr. D’ERCHIA. Thank you, Mr. Chairman. 

Ms. YOSHIZAWA. Thank you, Mr. Chairman. 

Ms. BARNES. Thank you, Mr. Chairman. 

Senator LEVIN. We are going to recess for 10 minutes. 

[Recess.] 

Senator LEVIN. OK. We will come back to order. 

Our third and final panel of witnesses for today’s hearing is Raymond McDaniel, Jr., Chairman and Chief Executive Officer of 

Moody’s Corporation, and Kathleen A. Corbet, the former President 

of Standard and Poor’s from 2004 to 2007. 

I don’t know if you were with us before when we said that under 

Rule 6 of our Subcommittee, all of our witnesses are required to 

be sworn. So I would ask you both to stand, raise your right hand, 

and answer the following question. Do you swear that all the testiVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000091 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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1The joint prepared statement of Mr. McDaniel and Ms. Yoshizawa appears in the Appendix 

on page 186. 

mony you are about to give will be the truth, the whole truth, and 

nothing but the truth, so help you, God? 

Mr. MCDANIEL. I do. 

Ms. CORBET. I do. 

Senator LEVIN. Thank you. And under our timing system, we will 

give you one minute notice. The light will turn from green to yellow. It will become red in 5 minutes, so we would ask that you try 

to limit your oral testimony to no more than 5 minutes. I know 

that sometimes that goes over, and if it does, it does, but we would 

ask you to make that effort. 

Mr. McDaniel, I think we will have you go first, followed by Ms. 

Corbet, and then we will turn to questions. Thank you both for 

being here today. Mr. McDaniel. 

TESTIMONY OF RAYMOND W. MCDANIEL, JR.,1 CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, MOODY’S CORPORATION 

Mr. MCDANIEL. Thank you, Mr. Chairman and Senator Kaufman. I am Ray McDaniel, Chairman and CEO of Moody’s Corporation, the parent of the credit rating agency Moody’s Investor Service. I want to thank you for the opportunity to contribute Moody’s 

views today. 

The global financial crisis has sparked a necessary debate about 

the role and performance of numerous participants in the financial 

markets. With respect to credit rating agencies, many market observers have expressed concerns that ratings did not better predict 

the deteriorating conditions in the subprime mortgage market. 

Let me assure you that Moody’s is not satisfied, and I am not 

satisfied, with the performance of our ratings during the unprecedented market downturn of the past 2 years. We did not anticipate 

the extraordinary confluence of forces that drove the unusually 

poor performance of subprime mortgages. We were not alone in this 

regard, but I believe that we should be at the leading edge for predictive opinions about credit risk. 

Some key issues influencing the unanticipated performance included the steep and sudden nationwide decline in home prices and 

the sharp contraction that followed in credit available from banks 

for mortgage refinancing. Moody’s did observe a trend of loosening 

mortgage underwriting and escalating home prices. We highlighted 

that trend in our reports and incorporated it into our analysis of 

mortgage-backed securities. And, as conditions in the U.S. housing 

market began to deteriorate beyond our expectations, we took the 

rating actions that we believed at the time were appropriate based 

on the information we had. 

Let me summarize our actions during the 2003 to 2007 time 

frame. First, starting in 2003, we identified and began commenting 

on the loosening of underwriting standards and escalating housing 

prices through our sector publications. 

Second, we tightened our ratings criteria in response to these 

loosening standards. In fact, between 2003 and 2006, we steadily 

increased our loss expectations and the levels of credit protection 

required for a given rating level. In practical terms, this meant 


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that by 2006, half the mortgages in a pool would have to default 

and provide a recovery of just half the appraised value of the home 

before a subprime RMBS bond rated AAA by Moody’s would suffer 

its first dollar of loss. This is a level of anticipated loss that far exceeded the losses that actually occurred in the past four real estate 

recessions. But even these conservative assumptions proved insufficient. 

Third, we took steps to watch and analyze the unprecedented 

market conditions and the behavior of various market participants 

as the crisis continued to unfold. For example, one question before 

the market was how borrowers, servicers, and banks would respond 

to the resetting of mortgage interest rates and how that behavior 

would affect default rates. Faced with extraordinary conditions, we 

saw market participants, including borrowers, mortgage servicers, 

mortgage originators, and the Federal Government, behave in historically unprecedented ways. 

Fourth, we took rating actions when the mortgage performance 

data warranted. Moody’s monitors the actual performance of the 

mortgages and the securities that we rate throughout the life of the 

security. The early performance of the 2006 loans was, in fact, comparable to the performance of similar subprime loans during the 

2000 and 2001 recession. And not until performance data from the 

second quarter of 2007 was available did it become clear that many 

of the 2006 vintage bonds might perform worse than those from the 

prior recession. 

In short, Moody’s did see the loosening of some prime lending 

standards. We reported our observations to the market and we incorporated our increasingly unfavorable views into the ratings we 

assigned. However, let me emphasize again that we, like most 

other market participants, did not anticipate the severity or the 

speed of deterioration that occurred in the U.S. housing market, 

nor did we anticipate the behavior of market participants in response to the housing downturn, including the speed of credit tightening by financial institutions that followed and exacerbated the 

situation. 

The unprecedented events of the last few years provide critical 

lessons to all market participants, certainly including us. At 

Moody’s over the past 2 years, we have undertaken a wide range 

of initiatives to strengthen the quality, transparency, and independence of our ratings. Some of these measures include establishing common macroeconomic scenarios for rating committees, 

publishing volatility scores and sensitivity analysis on structured 

finance securities, consolidating surveillance activities and structured finance under one leadership, and further bolstering the 

independence of and resources for our credit policy function. 

Moody’s is firmly committed to meeting the highest standards of 

integrity in our rating practices. We wholeheartedly support constructive reforms and we are eager to work with Congress, regulators, and other market participants to that end. 

I am happy to respond to your questions. 

Senator LEVIN. Thank you very much, Mr. McDaniel. Ms. Corbet. 


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1The prepared statement of Ms. Corbet appears in the Appendix on page 210. 

TESTIMONY OF KATHLEEN A. CORBET,1 FORMER PRESIDENT 

(2004–2007), STANDARD AND POOR’S 

Ms. CORBET. Thank you, Mr. Chairman and Senator Kaufman. 

My name is Kathleen Corbet and my career spans over 25 years 

of experience within the financial services industry. For a 3-year 

period during my career, I served as President as Standard and 

Poor’s, a division of the McGraw-Hill Companies, from April 2004 

until my voluntary departure in September 2007. 

Before turning to the substantive issues raised by the Subcommittee’s investigation, I would like to acknowledge the important work of the Subcommittee and Congress more broadly in its 

examination of the causes and consequences of the financial crisis. 

It is difficult not to feel personally touched by the pain experienced by many as a result of the turmoil in the subprime market 

and the financial crisis that followed. Many people feel anger, and 

in my view, that anger is understandable. Accordingly, I believe 

strongly that we should collectively use the lessons from this crisis 

to focus on effective reforms, stronger investor protections, better 

industry practices, and accountability. 

As background, I was recruited to join the McGraw-Hill Companies as an Executive Vice President of its Financial Services Division in April 2004 and served as President of Standard and Poor’s 

until my successor, Deven Sharma, took over that position in September 2007. During my 3-year tenure, I led an organization of 

8,000 employees based in 23 countries which provided financial information and market analysis to its customers and the broader 

market as a whole. 

The company was organized across four primary business units, 

including Rating Services, Equity Research Services, Index Services, and Data and Information Services. Each business unit was 

led by a seasoned executive having direct operating responsibility 

in the respective area and reporting directly to me. 

One of those units was Rating Services, which issued credit ratings on hundreds of thousands of securities across the globe, including corporate securities, government securities, and structured 

finance securities. Rating Services was led by an Executive Vice 

President for Ratings, an executive with over 30 years of experience in the ratings business, who had day-to-day operational responsibility for that business. Among her direct reports was the 

Executive Managing Director of Structured Finance Ratings, who 

was responsible for the day-to-day operations of the Structured Finance Ratings Group, the group that issued the ratings that are 

the subject of this Subcommittee’s focus. 

Consistent with S&P’s longstanding and publicly disclosed practice, ratings decisions were and are solely the province of committees comprised of experienced analysts in the relevant area. This 

practice is based on the principle that the highest quality analysis 

comes from the exercise of independent analytical judgment free 

from both undue external or internal pressure. Accordingly, during 

my tenure, I did not participate in any rating or analytical criteria 

committee meetings regarding ratings on any type of security, including mortgage-backed securities. 


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1The prepared statement of Mr. Blumenthal appears in the Appendix as Exhibit 109, on page 

1201. 

All that said, I do hope to be able to provide a business perspective that is helpful to the Subcommittee, and in my view, it is clear 

that many of the ratings S&P issued on securities backed by 

subprime mortgages have performed extremely poorly. S&P has 

publicly stated its profound disappointment with that performance, 

and I deeply share that sentiment. 

From my personal perspective, I believe the primary reason for 

these downgrades is that, despite its efforts to get the rating right 

and despite rooting its analysis in historical data, S&P’s assumptions did not capture the unprecedented and unexpected outcomes 

that later occurred with respect to the housing market, borrower 

behavior and credit correlations. 

S&P, along with others, has been criticized for its failure to predict what happened in the subprime market, and in many ways, 

that criticism is justifiable. Moreover, the subsequent outcome of 

the severe economic downturn and downgrades of securities backed 

by subprime mortgages highlight the challenges inherent in the nature of ratings. At their core, ratings are opinions about what may 

happen in the future, specifically, the likelihood that a particular 

security may default. 

I think that most people agree that predicting the future is always challenging and outcomes can often turn out very differently 

than even the most carefully derived predictions anticipate. The 

key from my perspective is to learn from these experiences and to 

take specific actions to improve. The credit rating industry has 

begun to respond in a constructive fashion, but there is much more 

to be done. 

Through the course of history and through many market cycles, 

the credit rating industry has played an important role in the financial system for nearly a century, and I do believe that it has 

the opportunity to continue to do so through the commitment to 

continual improvements and from appropriate regulatory reform. 

Again, I appreciate the goals of the Subcommittee’s work and 

would be glad to answer any questions that you have. 

Senator LEVIN. Thank you, Ms. Corbet. Thank you both. 

Before we start with questions, let me put into the record a 

statement of the Attorney General of the State of Connecticut, 

Richard Blumenthal. He has made a very powerful statement 

about the topic of the hearing today, which is ‘‘Wall Street and the 

Financial Crisis: The Role of Credit Rating Agencies,’’ and that will 

be made part of the record at an appropriate place.1

Were you both here earlier? 

Ms. CORBET. Yes, I was. 

Senator LEVIN. Mr. McDaniel, were you here, too? 

Mr. MCDANIEL. I was here for the second panel. 

Senator LEVIN. The second panel. 

Mr. MCDANIEL. Yes. 

Senator LEVIN. OK. Well, in that case, I may have to repeat some 

of the questions. 


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1See Exhibit No. 94b, which appears in the Appendix on page 599. 

2See Exhibit No. 93b, which appears in the Appendix on page 589. 

3See Exhibit No. 93c, which appears in the Appendix on page 590. 

4See Exhibit No. 93d, which appears in the Appendix on page 592. 

5See Exhibit No. 93a, which appears in the Appendix on page 587. 

The first exhibit that we have used is Exhibit 94b,1 where a 

Standard and Poor’s analyst wrote—maybe, Ms. Corbet, you could 

take a look at Exhibit 94b—‘‘Vertical is politically closely tied to 

Bank of America and is mostly a marketing shop - helping to take 

risk off books of Bank of America. Don’t see why we have to tolerate lack of cooperation. Deals likely not to perform.’’ This deal 

was rated by Standard and Poor’s anyway, even though the analyst 

said that the deal was not likely to perform. 

Then the next transaction that I want to look at with you was 

Fremont, which is Exhibit 93b.2 Standard and Poor’s was asked to 

rate an RMBS with subprime loans issued by Fremont Investment. 

This was a subprime lender known for poor quality loans. An email 

was sent by an S&P ratings analyst to his supervisor saying, ‘‘I 

have a Goldman deal with subprime Fremont collateral.’’ He says, 

‘‘Fremont collateral has been performing not so good. Is there anything special I should be aware of?’’ One supervisor says, ‘‘No, we 

don’t treat their collateral any differently.’’ Another one says, ‘‘if 

the current FICO scores are there, the answer is good to go.’’3

Now, there was a whole lot of evidence, a whole lot of evidence 

beside evidence right inside of S&P that Fremont collateral was 

problematical, to put it mildly. Fremont had stopped using 8,000 

brokers—that is Exhibit 93d4—due to the loans that those brokers 

were forwarding, which had some of the highest delinquency rates 

in the country. As a matter of fact, there was an exhibit where— 

Exhibit 93a5—a Moody’s analyst in late December 2006, before the 

Fremont deal was rated, said, ‘‘Holy cow . . . Fremont is such an 

outlier,’’ talking about their delinquency rates being one of the 

worst in the country. That is Exhibit 93a at the bottom. This analyst almost couldn’t believe it. ‘‘Holy cow—is this data correct? I 

just graphed it and Fremont is such an outlier!!’’ 

It was well known, publicly, inside of the credit rating agencies, 

that Fremont collateral was problematical. There had also been a 

California Court of Appeals decision described in an 8(k) filing by 

Fremont where there was sufficient evidence in a lawsuit by the 

California Insurance Commissioner talking about Fremont. There 

was a cease and desist order at the FDIC involving Fremont. But 

all we get internally here is, you are good to go. The fact that we 

know that they are problematical does not affect us. 

And I am just wondering—first, let me start with you, Ms. 

Corbet. Your own employees know that Fremont issued poor quality loans, high delinquency rates, and yet they handle Fremont 

loans the way they do any other loans. Shouldn’t that kind of a history be taken into account by S&P? 

Ms. CORBET. Well, first of all, Mr. Chairman, I am not familiar 

with this particular transaction or the people that wrote this email 

or corresponded with this email. I would say, however, that in the 

analysis of any transaction in terms of both the quantitative analysis and qualitative model, that all factors are considered in the 

consideration of a rating. 


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Senator LEVIN. Should be. 

Ms. CORBET. All factors should be considered, yes. 

Senator LEVIN. So that Standard and Poor’s assigns lower ratings to lenders that are known for poor quality loans with high delinquency rates? Does Standard and Poor’s assign lower ratings to 

lenders that are known for poor quality loans? 

Ms. CORBET. I would suggest to you that in this particular case, 

in terms of discussing the collateral, again, this is perhaps just one 

piece of a larger discussion around a transaction, but I think the 

question was, should anything be considered about the FICO 

scores, and that is something that has nothing to do necessarily 

with, in this particular case, the provider of this transaction, and 

I believe that whoever this person was that was responding said 

that shouldn’t make a difference. That is another element of data. 

It doesn’t mean that not everything was considered. It is just that 

means that it shouldn’t be changed in terms of treating it any differently. That would be my observations. Again, I don’t know anything specific about this transaction. 

Senator LEVIN. Well, I am asking you generically. In this transaction, you have got an analyst who says, ‘‘I have a Goldman deal 

with subprime Fremont collateral. Since Fremont collateral has 

been performing not so good, is there anything special I should be 

aware of?’’ Answer, ‘‘we don’t treat their collateral any differently.’’ 

My question, when you got Fremont, which has been not only 

publicly, but now internally an analyst says Fremont collateral has 

not been performing good, was that the right answer, don’t treat 

their collateral any differently? 

Ms. CORBET. I am not sure what they were referring to, whether 

they are treating it in a model, whether they are considering it in 

any other context, so I couldn’t say—— 

Senator LEVIN. Is that the right answer? 

Ms. CORBET. Again, I think it is—— 

Senator LEVIN. That is the whole answer. 

Ms. CORBET [continuing]. In a small context. It is not clear 

whether he is suggesting that it should be different in any other 

kind of model. It is the underlying collateral that I think he is referring to. 

Senator LEVIN. Should the collateral be treated differently where 

the collateral is coming from a company that is not performing so 

good? 

Ms. CORBET. Again, in the context of all the different variables 

that need to be considered, I could not comment as to whether or 

not the particular query that he is asking about—— 

Senator LEVIN. No, I am asking you a generic question. Should 

collateral that is coming from a company whose collateral in general is not performing so good, should that collateral be treated differently? 

Ms. CORBET. I think that certainly should be taken into consideration. 

Senator LEVIN. It wasn’t here. That is all I can tell you. It is your 

company, and I don’t know if anyone cares to do anything about 

it when you get that kind of an answer, but I would think that the 

message ought to go from the leadership of an agency—that is 

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ference. The answer is here from a supervisor, it doesn’t make any 

difference that their collateral is not performing well. 

Ms. CORBET. No. 

Senator LEVIN. You just said finally, after the fourth time I 

asked, it should be looked at differently. 

Ms. CORBET. And it doesn’t mean that it wasn’t. 

Senator LEVIN. You don’t know that it wasn’t. I don’t know that 

it wasn’t. 

Ms. CORBET. I don’t—— 

Senator LEVIN. All we know is what the response was, and you 

are saying it was the wrong response. It should be a factor in how 

it is treated, right? 

Ms. CORBET. And it very well might have been. 

Senator LEVIN. I am not asking you whether it might have been 

or was. It got a AAA rating. My question is, should it be treated 

differently? 

Ms. CORBET. I would expect it would be considered—— 

Senator LEVIN. And should? 

Ms. CORBET. I would expect that it would be considered, yes, sir. 

Senator LEVIN. And would you believe it should be considered 

differently? 

Ms. CORBET. I would expect that all of the different provisions 

of the transaction should be considered, yes, Senator. 

Senator LEVIN. Thank you. 

Now let me ask you, Mr. McDaniel, does Moody’s assign lower 

ratings to lenders that are known for poor quality loans with high 

delinquency rates? 

Mr. MCDANIEL. Do you mean to the lenders themselves? 

Senator LEVIN. No, to the loans of those lenders. 

Mr. MCDANIEL. Clearly, pools of lower-quality loans versus higher-quality loans is a credit factor, absolutely. 

Senator LEVIN. No, I am not asking you that. I am asking you 

whether or not you assign a lower rating if you know that the lender involved is known for poor quality loans with high delinquency 

rates. Is that something you look at when you rate their loans? 

Mr. MCDANIEL. It absolutely is something we look at, yes. 

Senator LEVIN. Senator Kaufman. 

Senator KAUFMAN. Thank you very much. 

Just so I get it clear, it is in your statements, I mean, but just 

to kind of concentrate on what it is, we know that thousands of 

RMBSes that were rated AAA in 2006–2007 are now rated as junk. 

Mr. McDaniel, what would you give precisely as what you think are 

the main reasons why that happened? 

Mr. MCDANIEL. I think there were a number of reasons. Among 

the principal or the most proximate reasons would be that we went 

from a period where there was a long period of home price appreciation. There was low interest rates and low credit spreads so that 

there was a lot of credit availability. We had the introduction of— 

when we had the introduction of a softening in the housing market, 

the loose credit that had been available tightened very rapidly and 

that curtailed refinancing opportunities for many borrowers who 

were anticipating that they were going to be able to refinance their 

mortgages. 

Senator KAUFMAN. OK. Ms. Corbet. 


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Ms. CORBET. I would concur with all of that statement. Indeed, 

it was predicting what the likely outcome would be, not only in 

terms of the housing market, but also unemployment, borrower behavior, also credit correlations. All of those in terms of the forecast 

were certainly not as great as the outcome that actually transpired. 

Senator KAUFMAN. So essentially it was the housing market. I 

mean, it was the housing market, all the things that were happening—— 

Ms. CORBET. It was the confluence, many factors—— 

Senator KAUFMAN [continuing]. The meltdown of all the things. 

Ms. CORBET. Yes. 

Senator KAUFMAN. Mr. McDaniel, is that—— 

Mr. MCDANIEL. That was it. 

Senator KAUFMAN. Mr. McDaniel, as you said in your testimony, 

and as you mentioned here earlier, as early as 2003, you were talking about the housing market. You were saying that the housing 

market—on page 18 of your testimony. So you knew as early as 

2003 this was going to be a problem. This just didn’t come on you 

in 2006 and 2007 like I think sometimes it is characterized by certain people, as kind of like a natural disaster. It was like a volcano 

or a hurricane. This housing thing happened, and you have just got 

to understand when things like that happen. We had years and 

years and this never happened before. Therefore—I mean, this is 

a constant theme we are hearing in these hearings. 

But as early as 2003, you knew the housing market was a problem and you lay out what your concerns are. So you are now at 

2006 and 2007, and I understand you have tightened your standards, but when it is all over, an incredible number of these thousands—they said something like 10,000 RMBSes from 2002 to 

2007, the majority of AAA ratings are now rated as junk. How does 

that happen? 

Mr. MCDANIEL. First, Senator, we did not identify a housing bubble in 2003. We certainly—— 

Senator KAUFMAN. No. I mean you saw the oncoming. 

Mr. MCDANIEL. Yes, we saw loosening underwriting standards—— 

Senator KAUFMAN. Right. 

Mr. MCDANIEL [continuing]. And we were certainly aware that 

home price appreciation was occurring through this period. 

Senator KAUFMAN. So, it is hard—Ms. Corbet, I will get back to 

it and maybe the two of you can work together. There is the chart. 

Oh, that bubble just came on. 

Look, I am not saying we are all victims of our own personal experience. In 2005, I sent my children a printout from Merrill Lynch 

of essentially that chart, and I sent with them what Merrill Lynch 

said. People say that this is because there are so many more people 

buying houses, but if that was true, they showed another chart and 

it showed then rental use would go up, too, and rental use was rock 

solid. So we have a housing bubble. That is what Merrill Lynch 

sent out to me as a Merrill Lynch investor and I sent it to my kids. 

The fact that we were coming onto a bubble, as you say, you 

didn’t say it in 2003, but you are talking about it generally and you 

are still—do you see my point? These products are still rolling off 

the assembly lines with AAA on them. 


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Mr. MCDANIEL. That is exactly why we were raising the credit 

protection levels associated with the highly-rated securities. I acknowledge they proved to be insufficient upward adjustments in 

credit protection. Those adjustments were overwhelmed by the actual performance of the mortgages that were created in the 2006– 

2007 period. 

Senator KAUFMAN. Ms. Corbet, does that agree with some of your 

position? 

Ms. CORBET. Yes. In fact, Standard and Poor’s was reporting on 

what they saw was the increasing risks of the housing bubble, and 

throughout the course of 2004, 2005, through 2007, those analyses 

and research vis-a-vis publications and teleconferences were provided to the market, as well as what the expected impact might be 

on subprime mortgages. 

Senator KAUFMAN. But you must admit, and I understand and 

I have understood for a long time that what most people think is 

AAA and most people think is what you do is not what you do, but 

it is fair to say that if you are sending out all kinds of advisories 

and putting all kinds of prints, but the AAAs are still rolling off 

the assembly line, that is really what affects investors, right? I 

mean, we have a problem here, but by the way, I am just going 

to send another group of AAAs down the old pike. And the argument is kind of like, well, historically, we really did well. This 

never happened before. 

But you had to have some kind of seeing that there is a dark 

cloud on the horizon, and you didn’t see those in the corporation. 

You get up every day kind of thinking about it. How am I going 

to make this work? How am I going to protect my brand? How am 

I going to make money? How am I going to make all this work? 

And, Ms. Corbet, I know you don’t take any part in doing the ratings, but was there any—I mean, did either of you feel a little bit 

uncomfortable? Did you get up in the morning and say, we are still 

rating these things AAA and it doesn’t look good, Mr. McDaniel? 

Let me put it this way, when did it hit you that maybe we ought 

to really take a hard look at what we are rating AAA, not what 

we are sending out, not that we are setting up credit backup, but 

what we are actually—RMBSes that we are rating AAA? About 

when did you start feeling, there is a problem here and I am the 

CEO. I am going to have to address that. 

Mr. MCDANIEL. We endeavor to take a hard look at everything 

we rate—— 

Senator KAUFMAN. No, but, I mean—— 

Mr. MCDANIEL [continuing]. Regardless of the rating level—— 

Senator KAUFMAN. No, I know, but there are some—— 

Mr. MCDANIEL [continuing]. Including AAA. 

Senator KAUFMAN. But somewhere in here, there was a point at 

which you did something differently, didn’t you? Or did this just 

kind of peter out on its own? Was there any modification of behavior as you—did you ever go to any of the people on your board or 

people that were working for you and say, look, this is a bad situation. We ought to start doing something a little different than what 

we did yesterday. 

Mr. MCDANIEL. We certainly were aggressively monitoring the 

market and looking at the performance of mortgages and associVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000100 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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ating that performance with the credit protection levels in these 

deals. If you are asking what was probably the most important 

point in time, at least for me—— 

Senator KAUFMAN. Yes. 

Mr. MCDANIEL [continuing]. It was when we saw that the delinquency and default trends for the mortgages originated in 2006 departed from the delinquency and default trends that we had seen 

in prior recessions, most recently the 2000–2001. 

Senator KAUFMAN. And when would you think that was? 

Mr. MCDANIEL. That was in the second quarter of 2007. Until 

then, they had been tracking almost identically to the default and 

delinquency trends we saw in the previous recession, and we knew 

that the transactions had more than sufficient credit protection to 

withstand that kind of a downturn. 

Senator KAUFMAN. So if I went back and looked, the number of 

AAAs rolling out the door as a percentage after the first quarter 

of 2007 would have begun to change? 

Mr. MCDANIEL. The credit protection levels were raised, and 

then the market shut down very quickly after that. 

Senator KAUFMAN. Ms. Corbet, when did you first pull your management team together and say, I don’t think this is like what has 

happened in the past. We are producing products—way too many 

of our AAAs are defaulting. We should really change the way 

things are going. 

Ms. CORBET. Well, I think Standard and Poor’s, concurrent with 

its own research and publications of some of the stresses that they 

were beginning to see in the marketplace back in 2005, they began 

to make, as earlier testified by the S&P folks, that they began to 

make changes in their criteria and their credit enhancement levels 

in 2005 and in 2006, as well. In fact, in 2006, the number of downgrades exceeded the number of upgrades for subprime residential 

mortgage-backed securities. So the actions were following the research and the findings that were being reported to the marketplace. 

In 2007, following again the two previous credit enhancement increases, again, the performance data was suggesting that it was 

even more serious than was previously contemplated, and so, therefore, in February 2007 S&P made another change and announcement of downgrades to—credit watch, excuse me, for subprime 

mortgages. 

In March, we reported also in a teleconference about what our 

outlook was in terms of expectations for the housing market and 

what the impact may be in terms of downgrades—— 

Senator KAUFMAN. And again, this reporting is great, but really, 

the key—— 

Ms. CORBET. Is actions, yes. 

Senator KAUFMAN. Yes. But, I mean, the key is how many AAAs 

are we sending out the door that in retrospect, when you look back 

on it 2 years later, are not AAA but they are junk? I mean, that 

is really the key. I think—and, Ms. Corbet, were you here for the 

first panel? 

Ms. CORBET. I was in and out, yes. 

Senator KAUFMAN. OK. That is not what they said in the first 

panel. They said a number of things, and what I would like to do 


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1See Exhibit No. 1g, which appears in the Appendix on page 242. 

is kind of go through them and see what you say. They said it was 

incentives. 

Ms. CORBET. Yes. 

Senator KAUFMAN. Mr. McDaniel, they said that there were incentives in the organization, in Moody’s, to get more business out 

the door, to not worry so much about what the rating is going to 

be, just move it out there, quantity over quality, I think, is the 

term that one of the gentlemen used. Clearly, you haven’t raised 

that as one of the problems. 

Mr. MCDANIEL. Ratings quality is paramount at Moody’s. It has 

been, I think, throughout our history and it continues to be. We 

rate according to published methodologies. Our thinking is as 

transparent as we can make it, to provide the market the opportunity to—— 

Senator KAUFMAN. So, basically, you just think that there was no 

incentive problem inside Moody’s, that essentially everything went 

just exactly as you just said. This is an operation that was smoothly functioning and there was no—the incentives—to the extent 

there were incentives for people to do things other than what you 

said, to take a cold eye view at everything, you just didn’t see it 

and you had no reports of anyone in your organization saying, 

maybe we are incentivizing people to maybe move the process a little bit one way or the other. 

Mr. MCDANIEL. We have many business objectives at the firm. 

None of those objectives are permitted to compromise ratings quality. People actively talk about whether our protocols and procedures are sufficient, whether they are best practice, should they be 

changed, and if they can be and we can improve ourselves, we do. 

Senator KAUFMAN. Yes. So I am just saying, in terms of what 

these four gentlemen were up here saying uniformly is something 

that you didn’t hear about at the time, don’t see it being a problem 

in terms of incentives, and that, essentially, everything was working smoothly from your view as CEO? 

Mr. MCDANIEL. I was not aware of any incentives being misaligned—— 

Senator KAUFMAN. When you talked about incentives in business 

meetings, did you ever say, look, we had better be careful that we 

don’t create too many incentives for market share and profits, that 

maybe someone down in the organization might get the wrong message and begin to kind of—especially when you had the explosion 

of business that you had during this period? Can you put the chart 

up that shows how much business grew?1 I mean, this was literally 

an explosion of business. And what they said was, this was a market. This is great. Look at this. 

Mr. MCDANIEL. Well—— 

Senator KAUFMAN. That usually happens in every business organization I have been involved in, management comes to me and 

says—let us get it out the door. Let us watch our profit line. Let 

us get this business. Let us be competitive. There were stories 

about market share where managers were in trouble if their market share dropped, and when they checked on why the market 

share dropped, the person said, look, these were just bad loans. We 


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1See Exhibit No. 24b, which appears in the Appendix on page 319. 

didn’t do them. And the manager came back and said, well, look, 

other people are doing it. You have dropped three points. We can’t 

have that. Do you believe any of that went on at Moody’s? 

Mr. MCDANIEL. I have been with Moody’s 23 years. I am unaware of any employee at Moody’s ever being removed or terminated for a market share—— 

Senator KAUFMAN. Or how about just basically said, get with the 

program? 

Mr. MCDANIEL. As I said, we are interested in—— 

Senator KAUFMAN. What would you attribute the incredible 

growth during this period to, great management practices? 

Mr. MCDANIEL. The growth in the debt markets. 

Senator KAUFMAN. Right. 

Mr. MCDANIEL. That is what I attribute that growth to. 

Senator KAUFMAN. OK. Ms. Corbet, in S&P, did you—— 

Ms. CORBET. In S&P, certainly the growth in the credit markets, 

but also in the three other businesses that S&P is involved in. The 

index services business is a very large and growing business with 

indices and ETFs, the data and information business, and, as well 

as equity research, and all four contributed to the growth at S&P. 

Senator KAUFMAN. Mr. McDaniel, I am not asking about this 

specific email because it was a long time ago, it was October 2007, 

but it says, analysts—this is from Moody’s Chief Risk Officer—‘‘Analysts and managing directors are continually pitched by bankers, 

issues, and investors, all with reasonable arguments. These views 

can color credit management judgments, sometimes improving it, 

other times degrading it. We call it, drinking the Kool-Aid. Coupled 

with strong—and this is a market share, market focus—this does 

constitute a risk to ratings quality.’’1

And I am not asking you about this specific thing, but you still 

say that you never had any feelings in the organization that the 

incentives and desire for short-term profits had any impact on your 

ratings? 

Mr. MCDANIEL. I am aware of the passage that you just read and 

the author of that passage was talking about the fact that we are 

gathering information from many different sources in the marketplace, issuers, investors—— 

Senator KAUFMAN. Yes. 

Mr. MCDANIEL [continuing]. Bankers, all with point of view—— 

Senator KAUFMAN. Right. 

Mr. MCDANIEL [continuing]. And that runs the risk of having our 

thinking match the consensus thinking in the marketplace—— 

Senator KAUFMAN. Right. 

Mr. MCDANIEL [continuing]. And that the strength of the work 

that we do is to have independent points of view. 

Senator KAUFMAN. Sure. No, I got that. 

And, Ms. Corbet, I didn’t get a chance for you to answer the 

question. When you were CEO of Standard and Poor’s, did you ever 

run into someone coming to you and saying, I feel under pressure 

to do some things, maybe in order to build business, in order to increase profitability? Never once, right? 

Ms. CORBET. No. 


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Senator KAUFMAN. OK. One of the men on the first panel who 

had been there for a number of years said the whole time he is 

worried, aren’t they going to see that they are destroying our 

brand? Aren’t they seeing by doing these short-term things we are 

destroying our brand? Mr. McDaniel, you never felt any problem 

during this period that what was going on—clearly, since you don’t 

think anything was going to hurt the Moody’s brand. 

Mr. MCDANIEL. The ability to run a successful business in the 

credit ratings industry is first and foremost dependent on having 

predictive ratings. And so business success is very tightly aligned 

with the quality of the ratings, which is—— 

Senator KAUFMAN. That is the point he was making. He is saying 

that our whole business depends on this. 

Mr. MCDANIEL. And that is why the performance of the subprime 

mortgage securities, particularly in 2006 and 2007, is so frustrating 

to me as a CEO, among other reasons. 

Senator KAUFMAN. Well, I don’t see why it would be frustrating, 

because basically, what happened was we had this housing market 

blow-up, and through no fault of our own, everything went south. 

There was nothing—you have not identified a single thing that was 

going on at Moody’s other than just you guys got caught in a bad 

housing market, not in a bad business market, a bad housing market. 

Mr. MCDANIEL. There are a number of things that, in hindsight, 

I wish we had done differently, absolutely. 

Senator KAUFMAN. That is really what I was trying to get at with 

the first question. What are some of the things that, in hindsight, 

you would have done differently? 

Mr. MCDANIEL. There are a number. I think at the macro level, 

we were insufficiently rigorous in thinking about trends in housing 

at an overall system level, and even more importantly, having 

thought about that, pushing that macroeconomic, macro housing 

perspective down into the rating committee deliberations. 

Senator KAUFMAN. How would you have done that? I mean, the 

system that you have laid out was, as Ms. Corbet even said—I 

didn’t have anything to do with this rating thing. I think your testimony is essentially—how would you have done that? How would 

you have, in this system, been able to communicate down and you 

say, look, we are not being rigorous enough in this analysis? What 

would you do mechanically? Would you send a memo to everybody 

and say, while we are doing this thing, let us take a look at these? 

Mr. MCDANIEL. What we are doing now is a formal macro risk 

perspective series. It is updated every 6 months. This is done on 

a global basis. And we are taking the relevant components of that 

macro risk perspective and the stress scenarios around that and 

delivering those to—not only to our own employees, but to the marketplace, as well, and instructing the managers and rating analysts 

that they should utilize the relevant parts of that macro analysis. 

We are also using, particularly in the mortgage sector, we are relying much more heavily on work done by a company that we purchased back in, I think it was late 2005, perhaps early 2006, 

Moody’seconomy.com, which provides housing analysis nationwide, 

housing demographic and econometric analysis. 


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Senator KAUFMAN. Is there anything else just short, any other 

thing you think in retrospect—— 

Mr. MCDANIEL. Yes. As I said, there are a number of things. 

Senator KAUFMAN. Right. 

Mr. MCDANIEL. In addition, we determined that we had to have 

more cross-disciplinary expertise in the rating committees, that 

there are other elements operating in the credit markets that may 

affect housing, that bringing different disciplines to bear in the rating really brings a richer perspective. 

We have changed governance practices in the ratings business. 

We have changed our methodologies and our enhancements. We 

have added different types of research to try and communicate our 

views as clearly as possible. There is a very long list and I am trying to hit on—— 

Senator KAUFMAN. I have got it. No, that is not good enough. 

Ms. Corbet, is there anything in retrospect that you would have 

done differently? 

Ms. CORBET. Well, similarly to Moody’s, Standard and Poor’s has 

taken increased steps in terms of governance, in terms of including 

in their forecasts and ratings elements of stability, the stability of 

ratings, the comparability of ratings—— 

Senator KAUFMAN. How about have you thought at all about the 

way you incentivize people within the organization? Has that been 

a concern at all? 

Ms. CORBET. Well, historically, and I believe that is the case 

today, that analysts have never been incentivized based on—— 

Senator KAUFMAN. No, I am not talking about analysts. I am 

talking about people from top to bottom in the organization, the 

business part of the organization. 

Ms. CORBET. At Standard and Poor’s throughout—certainly during my tenure—it has always been about the analytical quality and 

independence of the ratings being first and foremost and not being 

compromised. 

Senator KAUFMAN. Yes. I am sorry you didn’t hear the first panel 

because it was pretty unanimous that it stopped at some point and 

moved to a situation where the business part of—and by the way, 

just so you don’t feel bad, the hearing we had last week, Washington Mutual, exactly the same discussion went on, is it fair to 

say, that people that were involved in it feel that the incentives 

were such and the disincentives were such within the organization 

that things were done that they wish they hadn’t done, that quality 

was overlooked, that it was more about quantity than quality. 

So it is not just at Standard and Poor’s and Moody’s, and I am 

sure we are going to find, from everything I can see, it has happened in loads and loads of organizations. Things are going great. 

Let us do it. We know what we are doing. Let us just get the stuff 

out the door. So anyway, I am just saying, it is of concern, that also 

at Washington Mutual, the head of Washington Mutual had no 

idea this was going on while many people in the organization felt 

that was going on, so—— 

Ms. CORBET. Well, to the extent that was, and again—— 

Senator KAUFMAN. And I am going to ask you to comment later. 

Ms. CORBET [continuing]. I think that it is important that, and 

certainly was the case, I believe, at S&P, is that they should have 


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had the ability to raise those concerns with their management 

team—— 

Senator KAUFMAN. Sure. 

Ms. CORBET [continuing]. And hopefully those would have been 

addressed if those were—— 

Senator KAUFMAN. Yes, I know, and they did and they weren’t. 

A lot of people think it is CEO pay that makes Americans so upset. 

I have my own opinion that the CEO pay thing is. The average pay 

of a CEO as compared to the average working person has grown 

quite exponentially, and I know people are concerned about that. 

But I think it is more that when these things happen. I mean, 

the idea that one of the smartest people I ever met, Robert Rubin— 

one of the smartest people I ever met, I am not overstating that, 

smart from a standpoint of knowledge, smart in terms of politics, 

smart in everything else—is making $30 million a year as the Vice 

Chairman of Citigroup and says, I didn’t know there was this $49 

billion bomb down in the bottom of my business. I mean, that is 

what I think people are really upset about. They are upset about 

the pay, but then they are upset that when these things are going 

on and when things are going on down in their business, as these 

four—and they seem to me dedicated employees, they are not disgruntled employees. They said it almost like they were as upset as 

anyone else. And I know the companies I worked at, people would 

have been upset if they felt like the brand was being hurt, because 

people live it. 

But do either one of you want to comment a little bit on 

barbelling, the idea that FICO scores—that the way that you calculated FICO scores and used averages allowed ne’er-do-wells to 

kind of pick mortgages so that they could take advantage of the 

averages? Are you familiar with barbelling? 

Mr. MCDANIEL. As far as barbelling by taking strong and weak 

FICO scores—— 

Senator KAUFMAN. Right. 

Mr. MCDANIEL [continuing]. And averaging those out, we do not 

look at FICO scores on an average basis, so that barbelling, I 

don’t—— 

Senator KAUFMAN. And you never have? 

Mr. MCDANIEL. I don’t believe so, so I don’t think that would 

have achieved what someone might have wanted to achieve. 

Senator KAUFMAN. And, Ms. Corbet, do you—— 

Ms. CORBET. I am unfamiliar with the term. 

Senator KAUFMAN. Unfamiliar with the term. How about stated 

income loans? Mr. McDaniel, you are familiar with what a stated 

income loan is, aren’t you? 

Mr. MCDANIEL. Yes. 

Senator KAUFMAN. And, Ms. Corbet, are you familiar with stated 

income loans? 

Ms. CORBET. Yes. 

Senator KAUFMAN. Did you feel at any point there was like an 

explosion of stated income loans throughout the business? With the 

explosion of the business went the explosion of stated income loans, 

and from the data we have, there are many companies that were 

going—it started out as just a small part of the business and becoming more. At any point, did you get concerned or would you be 


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1See Exhibit No. 3, which appears in the Appendix on page 250. 

2See Exhibit No. 2, which appears in the Appendix on page 249. 

3See Exhibit No. 5, which appears in the Appendix on page 258. 

concerned, or is that part of the calculation of the ratings, that 

there were a lot of stated income loans in a particular security? 

Mr. MCDANIEL. Yes, that would absolutely be a credit factor for 

an analyst or rating committee to consider. 

Senator KAUFMAN. Do you know if any was, if it was? 

Mr. MCDANIEL. I have not participated in the rating committees—— 

Senator KAUFMAN. Right. 

Mr. MCDANIEL [continuing]. But I would be extremely surprised 

if they hadn’t. 

Senator KAUFMAN. Ms. Corbet. 

Ms. CORBET. I would expect the same. 

Senator KAUFMAN. Yes. OK. Mr. Chairman. 

Senator LEVIN. Thank you so much, Senator Kaufman. 

I think it is all well and good to look back and figure out what 

we would have done differently if we had known. Part of the responsibility is to look at what happened at the time. When we look 

at what happened at the time, we see the huge impact on the drive 

for market share on these companies, and there is just no getting 

away from it. The testimony this morning was very powerful about 

it. 

Just take a look at a few of the exhibits, Exhibit 3,1 first, in your 

book, if you would. It is August 17, 2004, importance, high. ‘‘Rich, 

We are meeting with your group this week to discuss adjusting criteria for rating CDOs of real estate assets this week because of the 

ongoing threat of losing deals.’’ Now, that is a Standard and Poor’s 

exhibit, August 2004, an ‘‘ongoing threat of losing deals.’’ 

Then you look at the next exhibit, Exhibit 2.2 This is Standard 

and Poor’s, as well. ‘‘We just lost a huge . . . RMBS deal to 

Moody’s due to a huge difference in the required credit support 

level.’’ Down a paragraph, ‘‘Losing one or even several deals due to 

criteria issues, but this is so significant that it could have an impact in future deals. There’s no way we can get back on this one 

but we need to address this now in preparation for future deals.’’ 

That is Exhibit 2. 

Then you look at Exhibit 5,3 the new S&P ratings model could 

have been released months ago, which is called Version 6.0, and 

‘‘resources assigned elsewhere if we didn’t have to massage the 

sub-prime and Alt–A numbers to preserve market share.’’ Preserve 

market share. We could have done the right thing, in other words, 

months ago if we didn’t have to massage the subprime and Alt–A 

numbers to preserve market share. This is contemporaneous. This 

isn’t looking back. This isn’t looking in the rearview mirror. This 

isn’t benefit of hindsight. This is what is going on at the time. 

Then you look at the testimony of Mr. Michalek this morning, a 

former analyst at Moody’s, pretty compelling testimony. He testifies that the President of Moody’s and the former head of Structured Finance, Brian Clarkson, who he believed was leading a 

change in culture at Moody’s away from the more analytical environment to a profit-driven one, more to their customer, the investment bank, instead of the real customer, the investing public, but 


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1See Exhibit No. 11, which appears in the Appendix on page 287. 

nonetheless what he says is that a number of bankers complained 

to Mr. Clarkson that Mr. Michalek was asking too many questions, 

doing too thorough a review. They wanted him removed from their 

deals, and they got their wish on future deals. 

Instead of rewarding Mr. Michalek for asking the probing questions and doing his job, he testified that Mr. Clarkson suggested 

that he provide an explanation for what he was doing and he ultimately was then not allowed to work on deals with certain banks. 

That message is a pretty clear message to employees. It is contemporaneous. It is at the time. 

Then you have another exhibit, Exhibit 11,1 email, May 2006. A 

UBS banker writes to S&P, ‘‘heard you guys are revising your residential [mortgage-backed securities] rating methodology - getting 

very punitive on silent seconds. [h]eard your ratings could be 5 

notches back . . . [g]onna to kill your [residential business]. [m]ay 

force us to do moodyfitch only cdos!’’ So, an S&P employee forwards 

the email to a colleague and he says, ‘‘Any truth to this?’’ The colleague responds, ‘‘We put out some criteria changes a couple of 

weeks ago that we will begin to use for deals closing in July. . . . 

We certainly did not intend to do anything to bump us off a significant amount of deals.’’ God forbid we do something which bumps 

us off a significant amount of deals. 

So, you want to look backwards, and we all do. When mistakes 

are made, we all love to just say, let us look forward. Don’t look 

in the rearview mirror. But folks, there was huge pressure, according to these documents and testimony, to preserve market share 

contemporaneously at the time this happened. 

And one of the reasons according to testimony and according to 

the exhibits that there was not downgrading of existing RMBSes 

and CDOs, despite existing delinquencies, was you have got to hold 

on to market share. Analysts didn’t have the data or the resources 

needed to do the volume of high-risk deals that they were asked 

to rate. You guys were making a lot of money. They didn’t have 

enough resources. Investment bankers had excessive influence. 

Why? You needed their business. 

Now, I want to give some other testimony. The manager of the 

CDOs, a guy named Gus Harris, used to tell staff that if they lose 

market share, they are going to be fired. And we have that testimony, contemporaneous testimony. Were you troubled by it when 

you heard it? I don’t know if you heard it all. 

Mr. MCDANIEL. As I said, no employee at Moody’s has ever been 

fired for market share issues, ever. 

Senator LEVIN. Have they been threatened that they would be 

fired? 

Mr. MCDANIEL. Not that I am aware of. 

Senator LEVIN. Is there any evidence that market share drove 

ratings? Have you seen it? Have you looked at these exhibits? Have 

you listened to what I just told you? 

Mr. MCDANIEL. As I testified earlier, ratings quality is paramount. 

Senator LEVIN. Of course. It is supposed to be paramount. 


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1See Exhibit No. 24a, which appears in the Appendix on page 318. 

2See Exhibit No. 24b, which appears in the Appendix on page 319. 

Mr. MCDANIEL. We look at other things that are relevant to running a business. That includes market share, and in particular in 

ratings includes market coverage, whether we are paid for that coverage or not because we are operating a system in which the comparative elements are important. So being able to compare one security to another with a common view of credit or a common language for credit as expressed in the rating, I do think is important. 

That is different from market share for financial purposes. 

Senator LEVIN. Ms. Corbet, are you surprised to hear testimony 

and exhibits about the impact of market share at the time? 

Ms. CORBET. Well, also, let me say, Mr. Chairman, that indeed, 

one of the things that Standard and Poor’s, I think early on, recognized, that to mitigate any pressure if it came from externally, as 

some of the emails indicated, was really to separate the commercial 

from the analytical process, and so I think that was important in 

terms of—and exists today in terms of there is separation of the 

business from the ratings. 

Market share in many different ways can be a measure of the 

market’s acceptance of the quality of the ratings, and so to the extent that market share declined, it could be many different things 

that would be looked into in terms of whether or not—and first and 

foremost, in any respect, that the quality of the ratings was in any 

way not useful to the marketplace. 

Senator LEVIN. If you look at Exhibit 24a,1 this is a Moody’s exhibit. This is the one we talked about before. ‘‘Market share by deal 

count dropped to 94%.’’ Any lower—‘‘It’s lower than the 98+% in 

prior quarters. Any reason for concern . . .?’’ 

And then you have this Exhibit 24b.2 If you look at that, Mr. 

McDaniel, I think that exhibit was put together by your Chief 

Credit Officer, is that correct, Mr. Kimball? 

Mr. MCDANIEL. Yes. That is correct. 

Senator LEVIN. He says that—he disputes that quality is king. 

He says it is at risk due to pressure from bankers. ‘‘Analysts and 

managing directors are continually ‘pitched’ by bankers, issuers, investors—all with reasonable arguments—whose views can color 

credit judgment, sometimes improving it, other times degrading it. 

(we drink the ‘kool-aid’). Coupled with strong internal emphasis on 

market share & margin focus, this does constitute a ‘risk’ to ratings 

quality.’’ That is his analysis. 

And then he says—I don’t know if you followed what I was reading on page two, ‘‘Analysts and MDs are continually pitched by 

bankers, issuers, investors.’’ Continually pitched. This constitutes 

‘‘a risk to ratings quality.’’ Do you agree with that? 

Mr. MCDANIEL. As I had commented before, the observation that 

our information sources oftentimes have points of view, whether it 

is issuers or investors, they have the risk of causing us to think 

on a consensus basis with the market and we want to have independent views. So I appreciate that Chief Credit Officer is thinking 

about these issues. I appreciate that he is raising them to my attention. And I have reacted by implementing many of the recommendations and thoughts that are included in his comments. 


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Senator LEVIN. When you say, you shouldn’t operate from consensus, it says that there is a strong internal emphasis on market 

share. 

Mr. MCDANIEL. Yes. That is—as I said, we have market coverage. 

Senator LEVIN. And that constitutes a risk to ratings quality. 

Does your emphasis on market share constitute a risk to ratings 

quality? 

Mr. MCDANIEL. If we are not attentive—— 

Senator LEVIN. That is what he is saying. He says it is coupled 

with an emphasis. 

Mr. MCDANIEL. He is saying—— 

Senator LEVIN. He is not saying if. He is saying, coupled with an 

emphasis. ‘‘With a strong internal emphasis on market share . . . 

this does constitute a risk to ratings quality.’’ That is him. 

Mr. MCDANIEL. Those are risks and they must be managed properly so that the rating system is not compromised in any way. 

Senator LEVIN. It says it is coupled with a strong internal emphasis, and you are saying that there is no such coupling? 

Mr. MCDANIEL. I am saying that is a risk and it must be managed properly so that the ratings are not compromised. 

Senator LEVIN. You say there is a strong internal emphasis, 

then, on market share? You agree to that? 

Mr. MCDANIEL. I pay attention to market share—— 

Senator LEVIN. I know you pay attention to it, but do you agree 

there is a strong internal emphasis on market share? 

Mr. MCDANIEL. I believe he thinks there is—— 

Senator LEVIN. Did you agree with him when you read that? 

Mr. MCDANIEL. I believe that attention to market share is one 

thing we must pay attention to in running the business. 

Senator LEVIN. Well, that is not my question. 

Mr. MCDANIEL. It is not as important as ratings quality, but I 

pay attention to it and I care about it. 

Senator LEVIN. But that wasn’t my question. 

Mr. MCDANIEL. I apologize, Mr. Chairman, I am trying to answer—— 

Senator LEVIN. Well, let me try again. Was he right that there 

is a strong internal emphasis on market share? 

Mr. MCDANIEL. There is a strong internal emphasis on market 

coverage, yes. 

Senator LEVIN. So you would not word it the way he does? 

Mr. MCDANIEL. I would not, but I understand that market coverage and market share can be conflated. 

Senator LEVIN. Can be what? 

Mr. MCDANIEL. Conflated. 

Senator LEVIN. Does that mean confused? 

Mr. MCDANIEL. No, used interchangeably. 

Senator LEVIN. But you would not phrase it that way? 

Mr. MCDANIEL. No. As I said, I think the market coverage issue 

is the more important issue. 

Senator LEVIN. Did he prepare this at your request? 

Mr. MCDANIEL. I actually don’t remember if he prepared it at my 

request or independently, but I do remember receiving it. 


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1See Exhibit No. 14, which appears in the Appendix on page 293. 

Senator LEVIN. Ms. Corbet, were you familiar with an FBI report 

that came out in 2004 that said that mortgage fraud was becoming 

more prevalent? 

Ms. CORBET. I am not specifically aware of that particular report. 

Senator LEVIN. Were you aware that the FBI in 2006 reported 

that the number of suspicious activity reports surrounding mortgage fraud rose by 700 percent? 

Ms. CORBET. Again, I am not familiar with that specific report. 

Senator LEVIN. And in the period 2004 to 2006, were you aware 

of the growth of interest-only loans, the broad use of interest-only 

loans? Do you know what I mean by interest-only loans? 

Ms. CORBET. I believe so, yes. 

Senator LEVIN. Were you aware that there was a large use of interest-only loans during that period? 

Ms. CORBET. I don’t know that I was aware of the amount, but 

I was aware that there were different types of loans being offered 

in the marketplace, yes. 

Senator LEVIN. Were you aware that there was a large growth 

in the utilization of interest-only loans during that period? 

Ms. CORBET. I am not aware of what percentage of growth. I was 

aware that those loans existed. 

Senator LEVIN. Were you aware that there was a large growth? 

I am not asking you for a percentage. Were you aware? 

Ms. CORBET. Yes. I was aware that those were new products in 

the marketplace, yes. 

Senator LEVIN. Were you aware in 2004 to 2006 of the growing 

use of no doc and low doc loans? 

Ms. CORBET. I am aware of that, yes. 

Senator LEVIN. Do you know what silent seconds are? 

Ms. CORBET. Honestly, I do not. 

Senator LEVIN. That is OK. I didn’t know a few months ago, either. Were you aware of the second liens? Do you know what second liens are? 

Ms. CORBET. I am familiar with the term—— 

Senator LEVIN. Second mortgages? 

Ms. CORBET. Yes. 

Senator LEVIN. This is Standard and Poor’s, an email—this is 

Exhibit 141—from Richard Koch to Michael Gutierrez. Do you 

know who those folks are or were? 

Ms. CORBET. No, I don’t. 

Senator LEVIN. OK. That email says, ‘‘[T]here has been a rampant appraisal and underwriting fraud in the industry for quite 

some time as pressure has mounted to feed the origination machine.’’ Would you agree that there was great pressure to feed the 

origination machine? 

Ms. CORBET. I am not aware of this specific email—— 

Senator LEVIN. No, I know that, but in general, were you aware 

that there was a huge demand for mortgages, to securitize mortgages? 

Ms. CORBET. I was certainly aware of the growth in securitized 

mortgages, yes. 


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1See Exhibit No. 5, which appears in the Appendix on page 258. 

2See Exhibit No. 87, which appears in the Appendix on page 535. 

3See Exhibit No. 91, which appears in the Appendix on page 541. 

4See Exhibit No. 90, which appears in the Appendix on page 539. 

Senator LEVIN. And the great demand for mortgages for that 

purpose? 

Ms. CORBET. And the demand from investors to invest in those 

securities, yes. 

Senator LEVIN. And from Wall Street to securitize—— 

Ms. CORBET. Yes. 

Senator LEVIN. You were aware of that? 

Ms. CORBET. Yes. 

Senator LEVIN. Were you aware of this Exhibit 5?1 I don’t know 

if I asked you specifically or not, Ms. Corbet. ‘‘Version 6.0 could’ve 

been released months ago and . . . assigned’’—I don’t know if I 

asked you specifically about that—if they ‘‘didn’t have to massage 

the subprime and Alt–A numbers to preserve market share.’’ Did 

I ask you what your reaction is to that? 

Ms. CORBET. You did not ask, but I can say—— 

Senator LEVIN. What is your reaction? 

Ms. CORBET. I am not familiar with what the topic that they are 

referring to or the people who they are addressing. 

Senator LEVIN. What is your reaction now that you read that, 

that something that would have been done otherwise could not be 

done because the writer, a Standard and Poor’s employee, had to 

‘‘massage the subprime and Alt–A numbers to preserve market 

share?’’ What is your reaction now that you read that? 

Ms. CORBET. Well, it is certainly troubling, but to the extent— 

again, it is probably—in the larger context, I am not sure what the 

subject might be addressing. But to the extent that was a concern, 

I would expect that would be reviewed, and to the extent it wasn’t 

addressed, it should have been raised to my attention. 

Senator LEVIN. Exhibit 872 is the subject we talked about with 

an earlier panel. There was a message from Ms. Warner in Exhibit 

87 pleading for resources. They are short-staffed, analyzed, overwhelmed. That is Exhibit 91.3 There are a number of exhibits that 

show the overwhelming shortage of staff, both to do the ratings, 

but also to do the reviews. Were you aware of that kind of shortfall 

of staff at that time? 

Ms. CORBET. Well, certainly in early 2007, as the number of securities were, again, starting to show deteriorating performance data, 

that indeed, the number of employees needed for this particular 

group needed to be increased. As I understand from Mr. D’Erchia’s 

testimony, this group did receive the needed resources. 

Senator LEVIN. Well, that is not the part of the testimony he finally acknowledged, which is they were short of resources and 

didn’t get what they requested. He tried to say that they shuffled 

back and forth, but they were short of resources. 

Exhibit 90, Mr. McDaniel, take a look at Exhibit 90.4 This is a 

document from a Moody’s employee, January 2006. ‘‘. . . I think we 

need full functionality with M3’’—that is the Moody’s model—‘‘first, 

especially if we’re to remain short-staffed for yet another year.’’ 

Were you short-staffed in January 2006? 

Mr. MCDANIEL. Yes. 


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Senator LEVIN. Were you aware of that? 

Mr. MCDANIEL. We had stress on our resources in this period, 

absolutely. 

Senator LEVIN. And you were making pretty good profit at that 

time, though, weren’t you? 

Mr. MCDANIEL. We were profitable, yes. 

Senator LEVIN. And take a look at Exhibit 91, another Moody’s 

employee in May 2007, if you would, Mr. McDaniel. The second 

paragraph. ‘‘Our analysts are overwhelmed.’’ This is Mr. Kolchinsky’s email. 

Mr. MCDANIEL. As I remarked, there were definitely resource 

stresses at this point in time. People were working longer hours 

than we wanted them to, working more days of the week than we 

wanted them to. It was not for lack of having open positions, but 

with the pace at which the market was growing, it was difficult to 

fill positions as quickly as we would have liked. 

Senator LEVIN. Did Moody’s reevaluate wholesale or just certain 

transactions? 

Mr. MCDANIEL. We monitor in our surveillance all transactions. 

Senator LEVIN. But did you reevaluate, for instance, an entire 

CDO or an entire RMBS? 

Mr. MCDANIEL. I apologize. I am not following—— 

Senator LEVIN. All right. If you have a new metric, you have got 

a new model that you are using to rate new securities, will you go 

back and use that model on existing securities? 

Mr. MCDANIEL. It would depend. 

Senator LEVIN. You didn’t retest the old deals, did you? 

Mr. MCDANIEL. In many cases, we do. In other cases, we do not. 

Senator LEVIN. And what about Standard and Poor’s? 

Ms. CORBET. There are two different processes once a security 

was issued. The surveillance group was looking at actual loan performance data to determine whether or not there would be any impact to the rating. 

Senator LEVIN. And you didn’t go and take a look at the entire 

rating for an entire issue? 

Ms. CORBET. Every issue was looked at for—in terms of the actual performance data. 

Senator LEVIN. So you went back and used the new model, or did 

you grandfather the old rating? Which one? 

Ms. CORBET. It was a different procedure for existing transactions, to look at actual performance data. And to the extent that 

criteria was changed on new issues, it would always be disclosed 

to the marketplace as to what extent any past transactions needed 

any criteria change or modification. 

Senator LEVIN. So you didn’t retest your old deals. You just disclosed the new rating to the marketplace? 

Ms. CORBET. We disclosed the new criteria and how it would impact securities that were to be rated going forward, that is correct. 

Senator LEVIN. In the future, going forward. 

Ms. CORBET. That is correct. 

Senator LEVIN. Is one of the reasons that you didn’t go back and 

apply your new model, what you now knew, to the old deals was 

because of a shortage of resources to do that? 

Ms. CORBET. No. 


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1See Exhibit No. 62, which appears in the Appendix on page 471. 

2See Exhibit No. 92a, which appears in the Appendix on page 543. 

Senator LEVIN. Was that one of the reasons that you didn’t do 

that, Mr. McDaniel? When you didn’t do that, was that shortage of 

resources? 

Mr. MCDANIEL. There are a number of reasons not to go 

back—— 

Senator LEVIN. Was that one of them? 

Mr. MCDANIEL. I don’t believe it would be. 

Senator LEVIN. OK. This is Exhibit 62.1 This is a Standard and 

Poor’s exhibit. It is at the bottom of page one. ‘‘How do we handle 

existing deals especially if there are material changes that can 

cause existing ratings to change?’’ And if you look at the top of 

page two, again, this is Standard and Poor’s, it says, ‘‘I do not 

know of a situation where there were wholesale changes to existing 

ratings when the primary group changed assumptions or even instituted new criteria. The two major reasons why we have taken 

this approach is, (i) lack of sufficient personnel resources.’’ Are you 

familiar with that document, Ms. Corbet? 

Ms. CORBET. No, I am not. This is the first—I just reviewed it 

this week. 

Senator LEVIN. All right. But this is not accurate This is not 

true? You said that—— 

Ms. CORBET. This is not my understanding of how securities 

were surveiled. 

Senator LEVIN. OK. And then if you take a look at Exhibit 92a,2

Mr. McDaniel. 

Mr. MCDANIEL. Yes. 

Senator LEVIN. This is a focus group associate survey. If you take 

a look at page three, you apparently were there at a series of interviews and focus groups. If you look at that first dot. And if you look 

at the findings, most indicated that SFG business objectives included increasing market share and/or coverage. Do you see that? 

Mr. MCDANIEL. Yes. 

Senator LEVIN. Now, after your mass downgrades in 2007, during 

the last 6 months, Moody’s rated about 500 subprime RMBS 

securities and S&P rated over 700. So you are still allowing these 

dubious mortgages to be put into the market. Hadn’t you already 

decided that these securities were high-risk in July? Hadn’t you 

already reached that conclusion? 

Mr. MCDANIEL. I don’t believe there were new RMBS transactions in late 2007—— 

Senator LEVIN. You don’t? In the last 6 months? 

Mr. MCDANIEL. Not that I recall. 

Ms. CORBET. I actually departed S&P at the beginning of September, so I am not familiar what the last 6 months of transactions 

were. 

Senator LEVIN. All right. Well, Moody’s did rate RMBS—— 

Mr. MCDANIEL. OK. I apologize. I did not recall that. 

Senator LEVIN. And in July, I guess, there was that massive 

downgrade of securities. Were you consulted when that happened? 

Mr. MCDANIEL. I was aware of the downgrade, yes. 

Senator LEVIN. Were you consulted? 


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1See Exhibit No. 52c, which appears in the Appendix on page 439. 

Mr. MCDANIEL. I was not consulted from a credit perspective in 

terms of whether it should happen or not. I was informed so that 

I would have an understanding of the action the rating committees 

were taking. 

Senator LEVIN. All right. But it was not your job to be part of 

that decision? 

Mr. MCDANIEL. That is correct. 

Senator LEVIN. Did you see the impact of those downgrades, 

those mass downgrades, on the market? Were you aware of the 

huge impact it had on the market when it happened? 

Mr. MCDANIEL. We were observing deterioration in performance 

of mortgages. That is what had the impact on the market, I believe—— 

Senator LEVIN. Yes. The subprime market just collapsed, right. 

Mr. MCDANIEL. And we were recognizing the deterioration with 

the rating downgrades, not causing the deterioration. 

Senator LEVIN. Well, if you would have done them a year earlier 

when you had information that the market was going under and 

was in trouble, if you would have done that over the year period 

and taken those early warning signs seriously and done your downgrading then, there wouldn’t have been such a mass downgrading 

a year later. That is the whole issue that we are looking at. 

I am sure you won’t agree with that, but it is, nonetheless, factually the case, that you had the information, you were applying the 

new model to new securities that you were rating. You did not rerate the old securities, according to one of the documents, because 

you didn’t want to apply the resources to do it and some other reasons. In any event, you didn’t do it. And as a result, you did it in 

a massive way and it had a huge effect. If you would have done 

it in a different way when you first got the information and first 

had those storm warnings, I think the argument, which is much 

more persuasive at that point, is that you would not have had this 

massive downgrading which had such a huge impact in July 2007. 

And again, I am happy to have your comment on that, if you 

want, but I don’t think you will probably want to agree with that. 

Maybe you do want to agree with it. 

Mr. MCDANIEL. We were managing the ratings system to react 

to actual performance data, and when it deviated from what we 

had seen in the previous recessions, that is when we took our actions. 

Senator LEVIN. In July 2007, did you know who David Goldstein 

was? 

Mr. MCDANIEL. No, I didn’t. 

Senator LEVIN. OK. Do you know who Dania Corledo was? 

Mr. MCDANIEL. No. 

Senator LEVIN. How about David Oman? 

Mr. MCDANIEL. No. I am sorry. 

Senator LEVIN. That is OK. How about David Bawden? 

Mr. MCDANIEL. No. 

Senator LEVIN. OK. Ms. Corbet, take a look at Exhibit 52c,1 if 

you would. This is an email dated March 20, 2007. This is an S&P 

employee who writes that, ‘‘In a meeting with Kathleen Corbet 


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1See Exhibit No. 24b, which appears in the Appendix on page 319. 

today, she requested we put together a marketing campaign 

around the events in the subprime market’’—now, this is March 

2007—‘‘the sooner, the better.’’ Why would you want to put together a marketing campaign in March 2007? 

Ms. CORBET. I would not use the term marketing campaign. 

What I did ask was for a more responsive communications campaign around the subprime market, and again, this followed along 

with a teleconference, an investor teleconference that we put on 

just about this time, shortly thereafter. 

Senator LEVIN. So you didn’t use the term that they said you 

used? 

Ms. CORBET. I don’t think that I would have used that term. It 

was clearly a communications effort. 

Senator LEVIN. Going back to this question of what happened 

late in 2007, in the last 6 months of 2007, after the crunch came, 

one of the last subprime RMBS deals that was rated was called 

Citigroup Mortgage Loan Trust, and both S&P and Moody’s rated 

this deal in December 2007. I don’t have any exhibits for you to 

look at, so I will just have to read this more slowly. December 

2007, that was months after both of your companies had downgraded thousands of subprime RMBSes. 

First of all, were you aware that your agency, each of you, gave 

a AAA rating to four tranches of a $386 million Citibank subprime 

deal in December 2007? Were you aware of that? 

Mr. MCDANIEL. No, I was not. 

Ms. CORBET. I was no longer with the company. 

Senator LEVIN. OK. And the press release from your firm—and 

I will just address this to you, Mr. McDaniel—when you rated the 

Citibank deal stated that you expected heightened losses and had 

accounted for that in the structure of the deal, but there was a 37 

percent loss. That is the actual losses as of today. They exceeded 

any expected loss, obviously, when you rated the deal. But does it 

surprise you that you were still rating those subprime RMBSes in 

December 2007, after what happened in July? Does that come as 

any surprise to you? 

Mr. MCDANIEL. I am surprised that there was a subprime RMBS 

security issued in the market. To the extent that we had updated 

our views and felt that those views would now be sufficient to provide protection for the ratings assigned, I can understand why the 

rating committee would do so. 

Senator LEVIN. Let me go back again to Exhibit 24b.1 There are 

a lot of interesting things there that your Chief Credit Officer, Mr. 

Kimball, wrote in October 2007 about issues and weaknesses that 

the organization needs to address after the subprime market had 

collapsed. 

One of the things he wrote, and this is under market share, he 

says in paragraph five, ‘‘Ideally, competition would be primarily on 

the basis of ratings quality’’—that is ideally—‘‘with a second component of price and a third component of service. Unfortunately, of 

the three competitive factors, rating quality is proving the least 

powerful.’’ 


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1See Exhibit No. 24b, which appears in the Appendix on page 319. 

Then two lines down, he says, ‘‘The real problem is not that the 

market does underweights rating quality but rather that, in some 

sectors it actually penalizes quality by awarding rating mandates 

based on the lowest credit enhancement needed for the highest rating. Unchecked competition on this basis can place the entire financial system at risk. It turns out that ratings quality has surprisingly few friends; issuers want high ratings; investors don’t 

want rating downgrades; short-sighted bankers labor shortsightedly to game the rating agencies for a few extra basis points 

on execution.’’ 

Would you agree with that? 

Mr. MCDANIEL. In this section, he is talking about the issue of 

rating shopping, and I agree that existed then and exists now. 

Senator LEVIN. All right. He is analyzing in paragraph seven. He 

says, ‘‘[T]he market share pressure persists’’ in certain areas. This 

is near the top. ‘‘Moody’s has erected safeguards to keep teams 

from too easily solving the market share problem by lowering 

standards. These protections do help protect credit quality. Ratings 

are assigned by committee, not individuals. However,’’ he says, ‘‘entire committees, entire departments are susceptible to market 

share objectives.’’ Do you agree with that? 

Mr. MCDANIEL. Well, in terms of financial incentive, the analysts 

would not be rewarded for market share or penalized for lack of 

market share. At management levels, there is more incentive associated with how the overall firm does financially, and so to the extent that there is a greater paid market share as opposed to just 

market coverage, that would have some impact on compensation at 

management levels, which is why we need appropriate safeguards 

and checks and balances. 

Senator LEVIN. Do you agree that entire committees are susceptible to market share objectives? 

Mr. MCDANIEL. Actually, no, I don’t agree—— 

Senator LEVIN. All right. 

Mr. MCDANIEL [continuing]. The committees are susceptible to 

that—— 

Senator LEVIN. Fair enough. 

Mr. MCDANIEL [continuing]. Because they are not standing committees. They are ad hoc committees. 

Senator LEVIN. In Exhibit 24b,1 paragraph 7(b), he says, ‘‘Methodologies and criteria are published and thus put boundaries on 

rating committees’ discretion.’’ Then he says, ‘‘However, there is 

usually plenty of latitude within those boundaries to register market influence.’’ Do you agree with that? 

Mr. MCDANIEL. I am not sure what he means by market influence, so I don’t know if I agree or not. 

Senator LEVIN. OK. In paragraph 23 of that same exhibit, ‘‘From 

a credit policy perspective, we want to be in a position to just say 

no to a market opportunity when imperative to do so from a quality 

perspective. We have done that in the past.’’ He gives some examples. ‘‘How to do it more aggressively without simply exiting whole 

market sectors is an unsolved problem.’’ Would you agree it is an 

unsolved problem? 


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1See Exhibit No. 98, which appears in the Appendix on page 684. 

Mr. MCDANIEL. It is an unsolved problem to the extent that the 

market is not rewarding ratings quality. If we don’t have customers 

for the highest quality ratings, this is an ongoing problem. 

Senator LEVIN. OK. You have a Town Meeting, Exhibit 98.1 It is 

a transcript of Moody’s managing directors. You spoke at that 

Town Meeting in September 2007. On page 63, you said that ‘‘What 

happened in 2004 and 2005 with respect to subordinated tranches 

is that our competition, Fitch and S&P, went nuts. Everything was 

investment grade. It didn’t really matter. . . . No one cared because the machine just kept going.’’ What do you mean by that? 

Pretty powerful stuff. Do you stand by that? 

Mr. MCDANIEL. I was talking about the subordinated tranches in 

the mortgage-backed securities area. We had a different opinion 

from our competitors, and we were obviously not being persuasive 

with the investor community in our more conservative opinion and 

it was having an impact. 

Senator LEVIN. Having an impact on what? 

Mr. MCDANIEL. On our business. We didn’t have as much coverage as a result. 

Senator LEVIN. Does that mean as much market share? 

Mr. MCDANIEL. Both. But really, I was talking about coverage in 

that case. There were—and the reason I keep making the distinction between market share and market coverage is, I think, that 

most people would associate market share with paid coverage, and 

I am talking about the coverage necessary to provide a comparative 

rating system, comparing one security to another. 

Senator LEVIN. Well, you were part of the competition there, Ms. 

Corbet. 

Ms. CORBET. Yes. 

Senator LEVIN. It says here that S&P ‘‘went nuts. Everything 

was investment grade.’’ 

Ms. CORBET. I don’t know what he is referring to. 

Senator LEVIN. ‘‘It really didn’t matter. No one cared, because 

the machine just kept going.’’ Is that true? I wish you would just 

say, yes, I stand by that, and that is what got us into trouble. 

Mr. MCDANIEL. For the sector I was talking about, I do stand by 

it. 

Senator LEVIN. Ratings kept churning out with poor models. 

Now, I will use your words. I think that the agencies really went 

overboard here and really went off the deep end, and here is the 

reason. You had poor models for these new structures. You had too 

few resources you were willing to commit. You had too much pressure from investment bankers. And the nuts didn’t end until these 

mass downgrades of July 2007, when it cratered the market for 

structured finance. 

This is what one of your managing directors said at that Town 

Meeting, Exhibit 98, and this is what he or she wrote. ‘‘[W]hy 

didn’t we envision that credit would tighten after being loose, and 

housing prices would fall after rising, after all most economic 

events are cyclical and bubbles inevitably burst.’’ And then he said, 

what happened in 2004—he asked then, too, for the leaders to be 

candid and to acknowledge what the problems were and what had 


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happened, and I think you have a long way to go in acknowledging 

what happened to your agencies. 

And this is what he is saying, and I happen to agree with him, 

that ‘‘Moody’s franchise value is based on staying ahead of the 

pack.’’ I would apply this, though, to both. It just happened you 

guys had a Town Meeting at Moody’s. I think the truth of this 

manager applies to both. He said, ‘‘Moody’s franchise value is based 

on staying ahead of the pack on credit analysis and instead we are 

in the middle of the pack. I would like more candor from senior 

management about our errors and how we will address them in the 

future.’’ 

That is one of the best comments that I have seen, and I hope 

you would see it that way, but I could understand that may not be 

the case. 

The SEC, Ms. Corbet, I think is conducting an investigation of 

S&P. They conducted an investigation. They found many problems, 

including staffing levels may have impacted various aspects of the 

ratings process. Is that true, that the SEC made that finding? 

Ms. CORBET. I don’t know, sir. 

Senator LEVIN. OK. They found that S&P made changes to its 

rating criteria without publishing those changes, that S&P, like 

Moody’s, had undocumented policies—I am quoting here—‘‘and procedures for rating RMBSes and CDOs.’’ Were you familiar with 

that finding of the SEC? 

Ms. CORBET. I am not familiar with that finding, no. 

Senator LEVIN. The SEC found relative to Moody’s that you had 

inadequate staffing levels which impacted the rating process, that 

Moody’s analysts were using unpublished models, that Moody’s analysts could be influenced in their rating by the fees charged to the 

issuers, that they were unable to find all the records surrounding 

a Moody’s rating, that Moody’s failed to retain or document certain 

significant steps in the rating process which made it difficult for 

the staff to assess compliance with its rating policies and procedures, and to identify the factors that were considered in developing a particular rating. Are you familiar with that? 

Mr. MCDANIEL. I am familiar with the SEC examination and the 

overall findings, yes. 

Senator LEVIN. Did you agree with them? 

Mr. MCDANIEL. The actions that the SEC asked us to take, we 

said we would take, so we are complying. 

Senator LEVIN. This is going to complete this panel, but I just 

have one very brief statement. 

The Subcommittee now has completed three of its four hearings 

examining some of the causes and consequences of the 2008 financial crisis. Last week, on Tuesday, we looked at the role of highrisk mortgages. Last Friday’s hearing looked at the failures of the 

bank regulators. Today, we looked at the role of credit rating agencies. It hasn’t been a pretty picture so far and I don’t think it is 

going to improve, although, frankly, the beginning of the Senate 

debate on strong financial reform next week does give us some 

hope. 

The final hearing of this quartet will be next Tuesday, when we 

are going to look at the role of investment banks, with Goldman 

Sachs being the case history. Our investigation has found that inVerDate Nov 24 2008 09:58 Dec 06, 2010 Jkt 57321 PO 00000 Frm 000119 Fmt 06633 Sfmt 06633 P:\DOCS\57321.TXT SAFFAIRS PsN: PAT

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vestment banks, such as Goldman Sachs, were not market makers 

helping clients. They were self-interested promoters of risky and 

complicated financial schemes that were a major part of the 2008 

crisis. They bundled toxic and dubious mortgages into complex financial instruments, got the credit rating agencies to label them as 

AAA safe securities, sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting 

against the financial instruments that they sold and profiting at 

the expense of their clients. 

I am introducing into the record now four exhibits that we will 

be using at the Tuesday hearing to explore the role of investment 

banks during the financial crisis. We will be putting those exhibits 

up on the Subcommittee’s Website either tonight or tomorrow. 

We thank this panel. We appreciate your being here. You have 

given us a great deal of documents. You have cooperated with this 

Subcommittee and we appreciate it. 

We will stand adjourned. 

Ms. CORBET. Thank you. 

Mr. MCDANIEL. Thank you, Mr. Chairman. 

[Whereupon, at 3:41 p.m., the Subcommittee was adjourned.] 


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ph44585 on D330-44585-7600 with DISTILLER57321.055
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ph44585 on D330-44585-7600 with DISTILLER57321.056
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ph44585 on D330-44585-7600 with DISTILLER57321.057
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ph44585 on D330-44585-7600 with DISTILLER57321.058
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ph44585 on D330-44585-7600 with DISTILLER57321.059
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ph44585 on D330-44585-7600 with DISTILLER57321.060
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ph44585 on D330-44585-7600 with DISTILLER57321.061
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ph44585 on D330-44585-7600 with DISTILLER57321.062
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ph44585 on D330-44585-7600 with DISTILLER57321.063
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ph44585 on D330-44585-7600 with DISTILLER57321.064
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ph44585 on D330-44585-7600 with DISTILLER57321.065
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ph44585 on D330-44585-7600 with DISTILLER57321.066
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ph44585 on D330-44585-7600 with DISTILLER57321.067
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ph44585 on D330-44585-7600 with DISTILLER57321.068
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ph44585 on D330-44585-7600 with DISTILLER57321.069
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ph44585 on D330-44585-7600 with DISTILLER57321.070
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ph44585 on D330-44585-7600 with DISTILLER57321.071
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ph44585 on D330-44585-7600 with DISTILLER57321.072
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ph44585 on D330-44585-7600 with DISTILLER57321.073
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ph44585 on D330-44585-7600 with DISTILLER57321.074
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ph44585 on D330-44585-7600 with DISTILLER57321.075
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ph44585 on D330-44585-7600 with DISTILLER57321.076
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ph44585 on D330-44585-7600 with DISTILLER57321.077
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ph44585 on D330-44585-7600 with DISTILLER57321.078
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ph44585 on D330-44585-7600 with DISTILLER57321.079
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ph44585 on D330-44585-7600 with DISTILLER57321.080
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ph44585 on D330-44585-7600 with DISTILLER57321.081
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ph44585 on D330-44585-7600 with DISTILLER57321.082
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ph44585 on D330-44585-7600 with DISTILLER57321.083
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ph44585 on D330-44585-7600 with DISTILLER57321.084
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ph44585 on D330-44585-7600 with DISTILLER57321.085
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ph44585 on D330-44585-7600 with DISTILLER57321.086
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ph44585 on D330-44585-7600 with DISTILLER57321.087
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ph44585 on D330-44585-7600 with DISTILLER57321.088
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ph44585 on D330-44585-7600 with DISTILLER57321.089
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ph44585 on D330-44585-7600 with DISTILLER57321.090
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ph44585 on D330-44585-7600 with DISTILLER57321.091
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ph44585 on D330-44585-7600 with DISTILLER57321.092
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ph44585 on D330-44585-7600 with DISTILLER57321.093
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ph44585 on D330-44585-7600 with DISTILLER57321.094
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ph44585 on D330-44585-7600 with DISTILLER57321.095
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ph44585 on D330-44585-7600 with DISTILLER57321.096
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ph44585 on D330-44585-7600 with DISTILLER57321.097
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ph44585 on D330-44585-7600 with DISTILLER57321.098
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ph44585 on D330-44585-7600 with DISTILLER57321.099
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ph44585 on D330-44585-7600 with DISTILLER57321.100
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ph44585 on D330-44585-7600 with DISTILLER57321.101
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ph44585 on D330-44585-7600 with DISTILLER57321.102
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ph44585 on D330-44585-7600 with DISTILLER57321.103
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ph44585 on D330-44585-7600 with DISTILLER57321.104
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ph44585 on D330-44585-7600 with DISTILLER57321.105
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ph44585 on D330-44585-7600 with DISTILLER57321.106
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ph44585 on D330-44585-7600 with DISTILLER57321.107
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ph44585 on D330-44585-7600 with DISTILLER57321.108
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ph44585 on D330-44585-7600 with DISTILLER57321.109
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ph44585 on D330-44585-7600 with DISTILLER57321.110
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ph44585 on D330-44585-7600 with DISTILLER57321.111
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ph44585 on D330-44585-7600 with DISTILLER57321.112
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ph44585 on D330-44585-7600 with DISTILLER57321.113
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ph44585 on D330-44585-7600 with DISTILLER57321.114
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ph44585 on D330-44585-7600 with DISTILLER57321.115
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ph44585 on D330-44585-7600 with DISTILLER57321.116
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ph44585 on D330-44585-7600 with DISTILLER57321.117
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ph44585 on D330-44585-7600 with DISTILLER57321.118
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ph44585 on D330-44585-7600 with DISTILLER57321.119
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ph44585 on D330-44585-7600 with DISTILLER57321.120
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ph44585 on D330-44585-7600 with DISTILLER57321.121
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ph44585 on D330-44585-7600 with DISTILLER57321.122
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ph44585 on D330-44585-7600 with DISTILLER57321.123
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ph44585 on D330-44585-7600 with DISTILLER57321.124
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ph44585 on D330-44585-7600 with DISTILLER57321.125
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ph44585 on D330-44585-7600 with DISTILLER57321.126
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ph44585 on D330-44585-7600 with DISTILLER57321.127
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ph44585 on D330-44585-7600 with DISTILLER57321.128
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ph44585 on D330-44585-7600 with DISTILLER57321.129
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ph44585 on D330-44585-7600 with DISTILLER57321.130
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ph44585 on D330-44585-7600 with DISTILLER57321.131
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ph44585 on D330-44585-7600 with DISTILLER57321.132
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ph44585 on D330-44585-7600 with DISTILLER57321.133
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ph44585 on D330-44585-7600 with DISTILLER57321.134
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ph44585 on D330-44585-7600 with DISTILLER57321.135
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ph44585 on D330-44585-7600 with DISTILLER57321.136
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ph44585 on D330-44585-7600 with DISTILLER57321.137
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ph44585 on D330-44585-7600 with DISTILLER57321.138
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ph44585 on D330-44585-7600 with DISTILLER57321.139
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ph44585 on D330-44585-7600 with DISTILLER57321.140
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ph44585 on D330-44585-7600 with DISTILLER57321.141
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ph44585 on D330-44585-7600 with DISTILLER57321.142
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ph44585 on D330-44585-7600 with DISTILLER57321.143
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ph44585 on D330-44585-7600 with DISTILLER57321.144
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ph44585 on D330-44585-7600 with DISTILLER57321.145
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ph44585 on D330-44585-7600 with DISTILLER57321.146
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ph44585 on D330-44585-7600 with DISTILLER57321.147
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ph44585 on D330-44585-7600 with DISTILLER57321.148
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ph44585 on D330-44585-7600 with DISTILLER57321.149
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ph44585 on D330-44585-7600 with DISTILLER57321.150
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ph44585 on D330-44585-7600 with DISTILLER57321.151
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ph44585 on D330-44585-7600 with DISTILLER57321.152
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ph44585 on D330-44585-7600 with DISTILLER57321.153
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ph44585 on D330-44585-7600 with DISTILLER57321.154
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ph44585 on D330-44585-7600 with DISTILLER57321.155
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ph44585 on D330-44585-7600 with DISTILLER57321.156
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ph44585 on D330-44585-7600 with DISTILLER57321.157
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ph44585 on D330-44585-7600 with DISTILLER57321.158
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ph44585 on D330-44585-7600 with DISTILLER57321.159
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ph44585 on D330-44585-7600 with DISTILLER57321.160
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ph44585 on D330-44585-7600 with DISTILLER57321.161
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ph44585 on D330-44585-7600 with DISTILLER57321.162
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ph44585 on D330-44585-7600 with DISTILLER57321.163
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ph44585 on D330-44585-7600 with DISTILLER57321.164
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ph44585 on D330-44585-7600 with DISTILLER57321.165
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ph44585 on D330-44585-7600 with DISTILLER57321.166
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ph44585 on D330-44585-7600 with DISTILLER57321.167
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ph44585 on D330-44585-7600 with DISTILLER57321.168
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ph44585 on D330-44585-7600 with DISTILLER57321.169
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ph44585 on D330-44585-7600 with DISTILLER57321.170
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ph44585 on D330-44585-7600 with DISTILLER57321.171
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ph44585 on D330-44585-7600 with DISTILLER57321.172
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ph44585 on D330-44585-7600 with DISTILLER57321.173
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ph44585 on D330-44585-7600 with DISTILLER57321.174
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ph44585 on D330-44585-7600 with DISTILLER57321.175
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ph44585 on D330-44585-7600 with DISTILLER57321.176
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ph44585 on D330-44585-7600 with DISTILLER57321.177
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ph44585 on D330-44585-7600 with DISTILLER57321.178
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ph44585 on D330-44585-7600 with DISTILLER57321.179
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ph44585 on D330-44585-7600 with DISTILLER57321.180
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ph44585 on D330-44585-7600 with DISTILLER57321.181
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ph44585 on D330-44585-7600 with DISTILLER57321.182
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ph44585 on D330-44585-7600 with DISTILLER57321.183
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ph44585 on D330-44585-7600 with DISTILLER57321.184
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ph44585 on D330-44585-7600 with DISTILLER57321.185
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ph44585 on D330-44585-7600 with DISTILLER57321.186
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ph44585 on D330-44585-7600 with DISTILLER57321.187
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ph44585 on D330-44585-7600 with DISTILLER57321.188
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ph44585 on D330-44585-7600 with DISTILLER57321.189
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ph44585 on D330-44585-7600 with DISTILLER57321.190
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ph44585 on D330-44585-7600 with DISTILLER57321.191
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ph44585 on D330-44585-7600 with DISTILLER57321.192
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ph44585 on D330-44585-7600 with DISTILLER57321.193
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ph44585 on D330-44585-7600 with DISTILLER57321.194
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ph44585 on D330-44585-7600 with DISTILLER57321.195
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ph44585 on D330-44585-7600 with DISTILLER57321.196
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ph44585 on D330-44585-7600 with DISTILLER57321.197
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ph44585 on D330-44585-7600 with DISTILLER57321.198
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ph44585 on D330-44585-7600 with DISTILLER57321.199
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ph44585 on D330-44585-7600 with DISTILLER57321.200
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ph44585 on D330-44585-7600 with DISTILLER57321.201
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ph44585 on D330-44585-7600 with DISTILLER57321.202
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ph44585 on D330-44585-7600 with DISTILLER57321.203
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ph44585 on D330-44585-7600 with DISTILLER57321.204
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ph44585 on D330-44585-7600 with DISTILLER57321.205
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ph44585 on D330-44585-7600 with DISTILLER57321.206
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ph44585 on D330-44585-7600 with DISTILLER57321.207
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ph44585 on D330-44585-7600 with DISTILLER57321.208
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ph44585 on D330-44585-7600 with DISTILLER57321.209
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ph44585 on D330-44585-7600 with DISTILLER57321.210
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ph44585 on D330-44585-7600 with DISTILLER57321.211
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ph44585 on D330-44585-7600 with DISTILLER57321.212
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ph44585 on D330-44585-7600 with DISTILLER57321.213
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ph44585 on D330-44585-7600 with DISTILLER57321.214
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ph44585 on D330-44585-7600 with DISTILLER57321.215
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ph44585 on D330-44585-7600 with DISTILLER57321.216
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ph44585 on D330-44585-7600 with DISTILLER57321.217
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ph44585 on D330-44585-7600 with DISTILLER57321.218
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ph44585 on D330-44585-7600 with DISTILLER57321.219
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ph44585 on D330-44585-7600 with DISTILLER57321.220
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ph44585 on D330-44585-7600 with DISTILLER57321.221
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ph44585 on D330-44585-7600 with DISTILLER57321.222
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ph44585 on D330-44585-7600 with DISTILLER57321.223
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ph44585 on D330-44585-7600 with DISTILLER57321.224
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ph44585 on D330-44585-7600 with DISTILLER57321.225
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ph44585 on D330-44585-7600 with DISTILLER57321.226
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ph44585 on D330-44585-7600 with DISTILLER57321.227
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ph44585 on D330-44585-7600 with DISTILLER57321.228
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ph44585 on D330-44585-7600 with DISTILLER57321.229
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ph44585 on D330-44585-7600 with DISTILLER57321.230
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ph44585 on D330-44585-7600 with DISTILLER57321.231
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ph44585 on D330-44585-7600 with DISTILLER57321.232
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ph44585 on D330-44585-7600 with DISTILLER57321.233
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ph44585 on D330-44585-7600 with DISTILLER57321.234
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ph44585 on D330-44585-7600 with DISTILLER57321.235
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ph44585 on D330-44585-7600 with DISTILLER57321.236
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ph44585 on D330-44585-7600 with DISTILLER57321.237
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ph44585 on D330-44585-7600 with DISTILLER57321.238
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ph44585 on D330-44585-7600 with DISTILLER57321.239
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ph44585 on D330-44585-7600 with DISTILLER57321.240
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ph44585 on D330-44585-7600 with DISTILLER57321.241
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ph44585 on D330-44585-7600 with DISTILLER57321.242
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ph44585 on D330-44585-7600 with DISTILLER57321.243
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ph44585 on D330-44585-7600 with DISTILLER57321.244
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ph44585 on D330-44585-7600 with DISTILLER57321.245
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ph44585 on D330-44585-7600 with DISTILLER57321.246
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ph44585 on D330-44585-7600 with DISTILLER57321.247
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ph44585 on D330-44585-7600 with DISTILLER57321.248
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ph44585 on D330-44585-7600 with DISTILLER57321.249
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ph44585 on D330-44585-7600 with DISTILLER57321.250
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ph44585 on D330-44585-7600 with DISTILLER57321.251
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ph44585 on D330-44585-7600 with DISTILLER57321.252
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ph44585 on D330-44585-7600 with DISTILLER57321.253
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ph44585 on D330-44585-7600 with DISTILLER57321.254
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ph44585 on D330-44585-7600 with DISTILLER57321.255
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ph44585 on D330-44585-7600 with DISTILLER57321.256
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ph44585 on D330-44585-7600 with DISTILLER57321.257
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ph44585 on D330-44585-7600 with DISTILLER57321.258
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ph44585 on D330-44585-7600 with DISTILLER57321.259
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ph44585 on D330-44585-7600 with DISTILLER57321.260
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ph44585 on D330-44585-7600 with DISTILLER57321.261
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ph44585 on D330-44585-7600 with DISTILLER57321.262
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ph44585 on D330-44585-7600 with DISTILLER57321.263
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ph44585 on D330-44585-7600 with DISTILLER57321.264
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ph44585 on D330-44585-7600 with DISTILLER57321.265
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ph44585 on D330-44585-7600 with DISTILLER57321.266
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ph44585 on D330-44585-7600 with DISTILLER57321.267
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ph44585 on D330-44585-7600 with DISTILLER57321.268
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ph44585 on D330-44585-7600 with DISTILLER57321.269
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ph44585 on D330-44585-7600 with DISTILLER57321.270
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ph44585 on D330-44585-7600 with DISTILLER57321.271
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ph44585 on D330-44585-7600 with DISTILLER57321.272
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ph44585 on D330-44585-7600 with DISTILLER57321.273
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ph44585 on D330-44585-7600 with DISTILLER57321.274
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ph44585 on D330-44585-7600 with DISTILLER57321.275
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ph44585 on D330-44585-7600 with DISTILLER57321.276
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ph44585 on D330-44585-7600 with DISTILLER57321.277
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ph44585 on D330-44585-7600 with DISTILLER57321.278
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ph44585 on D330-44585-7600 with DISTILLER57321.279
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ph44585 on D330-44585-7600 with DISTILLER57321.280
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ph44585 on D330-44585-7600 with DISTILLER57321.281
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ph44585 on D330-44585-7600 with DISTILLER57321.282
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ph44585 on D330-44585-7600 with DISTILLER57321.283
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ph44585 on D330-44585-7600 with DISTILLER57321.284
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ph44585 on D330-44585-7600 with DISTILLER57321.285
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ph44585 on D330-44585-7600 with DISTILLER57321.286
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ph44585 on D330-44585-7600 with DISTILLER57321.287
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ph44585 on D330-44585-7600 with DISTILLER57321.288
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ph44585 on D330-44585-7600 with DISTILLER57321.289
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ph44585 on D330-44585-7600 with DISTILLER57321.290
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ph44585 on D330-44585-7600 with DISTILLER57321.291
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ph44585 on D330-44585-7600 with DISTILLER57321.292
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ph44585 on D330-44585-7600 with DISTILLER57321.293
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ph44585 on D330-44585-7600 with DISTILLER57321.294
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ph44585 on D330-44585-7600 with DISTILLER57321.295
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ph44585 on D330-44585-7600 with DISTILLER57321.296
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ph44585 on D330-44585-7600 with DISTILLER57321.297
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ph44585 on D330-44585-7600 with DISTILLER57321.298
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ph44585 on D330-44585-7600 with DISTILLER57321.299
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ph44585 on D330-44585-7600 with DISTILLER57321.300
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ph44585 on D330-44585-7600 with DISTILLER57321.301
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ph44585 on D330-44585-7600 with DISTILLER57321.302
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ph44585 on D330-44585-7600 with DISTILLER57321.303
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ph44585 on D330-44585-7600 with DISTILLER57321.304
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ph44585 on D330-44585-7600 with DISTILLER57321.305
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ph44585 on D330-44585-7600 with DISTILLER57321.306
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ph44585 on D330-44585-7600 with DISTILLER57321.307
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ph44585 on D330-44585-7600 with DISTILLER57321.308
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ph44585 on D330-44585-7600 with DISTILLER57321.309
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ph44585 on D330-44585-7600 with DISTILLER57321.310
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ph44585 on D330-44585-7600 with DISTILLER57321.311
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ph44585 on D330-44585-7600 with DISTILLER57321.312
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ph44585 on D330-44585-7600 with DISTILLER57321.313
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ph44585 on D330-44585-7600 with DISTILLER57321.314
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ph44585 on D330-44585-7600 with DISTILLER57321.315
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ph44585 on D330-44585-7600 with DISTILLER57321.316
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ph44585 on D330-44585-7600 with DISTILLER57321.317
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ph44585 on D330-44585-7600 with DISTILLER57321.318
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ph44585 on D330-44585-7600 with DISTILLER57321.319
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ph44585 on D330-44585-7600 with DISTILLER57321.320
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ph44585 on D330-44585-7600 with DISTILLER57321.321
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ph44585 on D330-44585-7600 with DISTILLER57321.322
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ph44585 on D330-44585-7600 with DISTILLER57321.327
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ph44585 on D330-44585-7600 with DISTILLER57321.328
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ph44585 on D330-44585-7600 with DISTILLER57321.329
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ph44585 on D330-44585-7600 with DISTILLER57321.330
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ph44585 on D330-44585-7600 with DISTILLER57321.331
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ph44585 on D330-44585-7600 with DISTILLER57321.332
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ph44585 on D330-44585-7600 with DISTILLER57321.333
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ph44585 on D330-44585-7600 with DISTILLER57321.334
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ph44585 on D330-44585-7600 with DISTILLER57321.335
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ph44585 on D330-44585-7600 with DISTILLER57321.336
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ph44585 on D330-44585-7600 with DISTILLER57321.337
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ph44585 on D330-44585-7600 with DISTILLER57321.338
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ph44585 on D330-44585-7600 with DISTILLER57321.339
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ph44585 on D330-44585-7600 with DISTILLER57321.340
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ph44585 on D330-44585-7600 with DISTILLER57321.341
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ph44585 on D330-44585-7600 with DISTILLER57321.342
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ph44585 on D330-44585-7600 with DISTILLER57321.343
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ph44585 on D330-44585-7600 with DISTILLER57321.344
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ph44585 on D330-44585-7600 with DISTILLER57321.345
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ph44585 on D330-44585-7600 with DISTILLER57321.346
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ph44585 on D330-44585-7600 with DISTILLER57321.347
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ph44585 on D330-44585-7600 with DISTILLER57321.348
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ph44585 on D330-44585-7600 with DISTILLER57321.349
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ph44585 on D330-44585-7600 with DISTILLER57321.350
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ph44585 on D330-44585-7600 with DISTILLER57321.351
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ph44585 on D330-44585-7600 with DISTILLER57321.352
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ph44585 on D330-44585-7600 with DISTILLER57321.353
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ph44585 on D330-44585-7600 with DISTILLER57321.354
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ph44585 on D330-44585-7600 with DISTILLER57321.355
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ph44585 on D330-44585-7600 with DISTILLER57321.356
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ph44585 on D330-44585-7600 with DISTILLER57321.357
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ph44585 on D330-44585-7600 with DISTILLER57321.358
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ph44585 on D330-44585-7600 with DISTILLER57321.359
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ph44585 on D330-44585-7600 with DISTILLER57321.360
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ph44585 on D330-44585-7600 with DISTILLER57321.361
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ph44585 on D330-44585-7600 with DISTILLER57321.362
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ph44585 on D330-44585-7600 with DISTILLER57321.363
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ph44585 on D330-44585-7600 with DISTILLER57321.364
469 


ph44585 on D330-44585-7600 with DISTILLER57321.365
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ph44585 on D330-44585-7600 with DISTILLER57321.366
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ph44585 on D330-44585-7600 with DISTILLER57321.367
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ph44585 on D330-44585-7600 with DISTILLER57321.368
473 


ph44585 on D330-44585-7600 with DISTILLER57321.369
474 


ph44585 on D330-44585-7600 with DISTILLER57321.370
475 


ph44585 on D330-44585-7600 with DISTILLER57321.371
476 


ph44585 on D330-44585-7600 with DISTILLER57321.372
477 


ph44585 on D330-44585-7600 with DISTILLER57321.373
478 


ph44585 on D330-44585-7600 with DISTILLER57321.374
479 


ph44585 on D330-44585-7600 with DISTILLER57321.375
480 


ph44585 on D330-44585-7600 with DISTILLER57321.376
481 


ph44585 on D330-44585-7600 with DISTILLER57321.377
482 


ph44585 on D330-44585-7600 with DISTILLER57321.378
483 


ph44585 on D330-44585-7600 with DISTILLER57321.379
484 


ph44585 on D330-44585-7600 with DISTILLER57321.380
485 


ph44585 on D330-44585-7600 with DISTILLER57321.381
486 


ph44585 on D330-44585-7600 with DISTILLER57321.382
487 


ph44585 on D330-44585-7600 with DISTILLER57321.383
488 


ph44585 on D330-44585-7600 with DISTILLER57321.384
489 


ph44585 on D330-44585-7600 with DISTILLER57321.385
490 


ph44585 on D330-44585-7600 with DISTILLER57321.386
491 


ph44585 on D330-44585-7600 with DISTILLER57321.387
492 


ph44585 on D330-44585-7600 with DISTILLER57321.388
493 


ph44585 on D330-44585-7600 with DISTILLER57321.389
494 


ph44585 on D330-44585-7600 with DISTILLER57321.390
495 


ph44585 on D330-44585-7600 with DISTILLER57321.391
496 


ph44585 on D330-44585-7600 with DISTILLER57321.392
497 


ph44585 on D330-44585-7600 with DISTILLER57321.393
498 


ph44585 on D330-44585-7600 with DISTILLER57321.394
499 


ph44585 on D330-44585-7600 with DISTILLER57321.395
500 


ph44585 on D330-44585-7600 with DISTILLER57321.396
501 


ph44585 on D330-44585-7600 with DISTILLER57321.397
502 


ph44585 on D330-44585-7600 with DISTILLER57321.398
503 


ph44585 on D330-44585-7600 with DISTILLER57321.399
504 


ph44585 on D330-44585-7600 with DISTILLER57321.400
505 


ph44585 on D330-44585-7600 with DISTILLER57321.401
506 


ph44585 on D330-44585-7600 with DISTILLER57321.402
507 


ph44585 on D330-44585-7600 with DISTILLER57321.403
508 


ph44585 on D330-44585-7600 with DISTILLER57321.404
509 


ph44585 on D330-44585-7600 with DISTILLER57321.405
510 


ph44585 on D330-44585-7600 with DISTILLER57321.406
511 


ph44585 on D330-44585-7600 with DISTILLER57321.407
512 


ph44585 on D330-44585-7600 with DISTILLER57321.408
513 


ph44585 on D330-44585-7600 with DISTILLER57321.409
514 


ph44585 on D330-44585-7600 with DISTILLER57321.410
515 


ph44585 on D330-44585-7600 with DISTILLER57321.411
516 


ph44585 on D330-44585-7600 with DISTILLER57321.412
517 


ph44585 on D330-44585-7600 with DISTILLER57321.413
518 


ph44585 on D330-44585-7600 with DISTILLER57321.414
519 


ph44585 on D330-44585-7600 with DISTILLER57321.415
520 


ph44585 on D330-44585-7600 with DISTILLER57321.416
521 


ph44585 on D330-44585-7600 with DISTILLER57321.417
522 


ph44585 on D330-44585-7600 with DISTILLER57321.418
523 


ph44585 on D330-44585-7600 with DISTILLER57321.419
524 


ph44585 on D330-44585-7600 with DISTILLER57321.420
525 


ph44585 on D330-44585-7600 with DISTILLER57321.421
526 


ph44585 on D330-44585-7600 with DISTILLER57321.422
527 


ph44585 on D330-44585-7600 with DISTILLER57321.423
528 


ph44585 on D330-44585-7600 with DISTILLER57321.424
529 


ph44585 on D330-44585-7600 with DISTILLER57321.425
530 


ph44585 on D330-44585-7600 with DISTILLER57321.426
531 


ph44585 on D330-44585-7600 with DISTILLER57321.427
532 


ph44585 on D330-44585-7600 with DISTILLER57321.428
533 


ph44585 on D330-44585-7600 with DISTILLER57321.429
534 


ph44585 on D330-44585-7600 with DISTILLER57321.430
535 


ph44585 on D330-44585-7600 with DISTILLER57321.431
536 


ph44585 on D330-44585-7600 with DISTILLER57321.432
537 


ph44585 on D330-44585-7600 with DISTILLER57321.433
538 


ph44585 on D330-44585-7600 with DISTILLER57321.434
539 


ph44585 on D330-44585-7600 with DISTILLER57321.435
540 


ph44585 on D330-44585-7600 with DISTILLER57321.436
541 


ph44585 on D330-44585-7600 with DISTILLER57321.437
542 


ph44585 on D330-44585-7600 with DISTILLER57321.438
543 


ph44585 on D330-44585-7600 with DISTILLER57321.439
544 


ph44585 on D330-44585-7600 with DISTILLER57321.440
545 


ph44585 on D330-44585-7600 with DISTILLER57321.441
546 


ph44585 on D330-44585-7600 with DISTILLER57321.442
547 


ph44585 on D330-44585-7600 with DISTILLER57321.443
548 


ph44585 on D330-44585-7600 with DISTILLER57321.444
549 


ph44585 on D330-44585-7600 with DISTILLER57321.445
550 


ph44585 on D330-44585-7600 with DISTILLER57321.446
551 


ph44585 on D330-44585-7600 with DISTILLER57321.447
552 


ph44585 on D330-44585-7600 with DISTILLER57321.448
553 


ph44585 on D330-44585-7600 with DISTILLER57321.449
554 


ph44585 on D330-44585-7600 with DISTILLER57321.450
555 


ph44585 on D330-44585-7600 with DISTILLER57321.451
556 


ph44585 on D330-44585-7600 with DISTILLER57321.452
557 


ph44585 on D330-44585-7600 with DISTILLER57321.453
558 


ph44585 on D330-44585-7600 with DISTILLER57321.454
559 


ph44585 on D330-44585-7600 with DISTILLER57321.455
560 


ph44585 on D330-44585-7600 with DISTILLER57321.456
561 


ph44585 on D330-44585-7600 with DISTILLER57321.457
562 


ph44585 on D330-44585-7600 with DISTILLER57321.458
563 


ph44585 on D330-44585-7600 with DISTILLER57321.459
564 


ph44585 on D330-44585-7600 with DISTILLER57321.460
565 


ph44585 on D330-44585-7600 with DISTILLER57321.461
566 


ph44585 on D330-44585-7600 with DISTILLER57321.462
567 


ph44585 on D330-44585-7600 with DISTILLER57321.463
568 


ph44585 on D330-44585-7600 with DISTILLER57321.464
569 


ph44585 on D330-44585-7600 with DISTILLER57321.465
570 


ph44585 on D330-44585-7600 with DISTILLER57321.466
571 


ph44585 on D330-44585-7600 with DISTILLER57321.467
572 


ph44585 on D330-44585-7600 with DISTILLER57321.468
573 


ph44585 on D330-44585-7600 with DISTILLER57321.469
574 


ph44585 on D330-44585-7600 with DISTILLER57321.470
575 


ph44585 on D330-44585-7600 with DISTILLER57321.471
576 


ph44585 on D330-44585-7600 with DISTILLER57321.472
577 


ph44585 on D330-44585-7600 with DISTILLER57321.473
578 


ph44585 on D330-44585-7600 with DISTILLER57321.474
579 


ph44585 on D330-44585-7600 with DISTILLER57321.475
580 


ph44585 on D330-44585-7600 with DISTILLER57321.476
581 


ph44585 on D330-44585-7600 with DISTILLER57321.477
582 


ph44585 on D330-44585-7600 with DISTILLER57321.478
583 


ph44585 on D330-44585-7600 with DISTILLER57321.479
584 


ph44585 on D330-44585-7600 with DISTILLER57321.480
585 


ph44585 on D330-44585-7600 with DISTILLER57321.481
586 


ph44585 on D330-44585-7600 with DISTILLER57321.482
587 


ph44585 on D330-44585-7600 with DISTILLER57321.483
588 


ph44585 on D330-44585-7600 with DISTILLER57321.484
589 


ph44585 on D330-44585-7600 with DISTILLER57321.485
590 


ph44585 on D330-44585-7600 with DISTILLER57321.486
591 


ph44585 on D330-44585-7600 with DISTILLER57321.487
592 


ph44585 on D330-44585-7600 with DISTILLER57321.488
593 


ph44585 on D330-44585-7600 with DISTILLER57321.489
594 


ph44585 on D330-44585-7600 with DISTILLER57321.490
595 


ph44585 on D330-44585-7600 with DISTILLER57321.491
596 


ph44585 on D330-44585-7600 with DISTILLER57321.492
597 


ph44585 on D330-44585-7600 with DISTILLER57321.493
598 


ph44585 on D330-44585-7600 with DISTILLER57321.494
599 


ph44585 on D330-44585-7600 with DISTILLER57321.495
600 


ph44585 on D330-44585-7600 with DISTILLER57321.496
601 


ph44585 on D330-44585-7600 with DISTILLER57321.497
602 


ph44585 on D330-44585-7600 with DISTILLER57321.498
603 


ph44585 on D330-44585-7600 with DISTILLER57321.499
604 


ph44585 on D330-44585-7600 with DISTILLER57321.500
605 


ph44585 on D330-44585-7600 with DISTILLER57321.501
606 


ph44585 on D330-44585-7600 with DISTILLER57321.502
607 


ph44585 on D330-44585-7600 with DISTILLER57321.503
608 


ph44585 on D330-44585-7600 with DISTILLER57321.504
609 


ph44585 on D330-44585-7600 with DISTILLER57321.505
610 


ph44585 on D330-44585-7600 with DISTILLER57321.506
611 


ph44585 on D330-44585-7600 with DISTILLER57321.507
612 


ph44585 on D330-44585-7600 with DISTILLER57321.508
613 


ph44585 on D330-44585-7600 with DISTILLER57321.509
614 


ph44585 on D330-44585-7600 with DISTILLER57321.510
615 


ph44585 on D330-44585-7600 with DISTILLER57321.511
616 


ph44585 on D330-44585-7600 with DISTILLER57321.512
617 


ph44585 on D330-44585-7600 with DISTILLER57321.513
618 


ph44585 on D330-44585-7600 with DISTILLER57321.514
619 


ph44585 on D330-44585-7600 with DISTILLER57321.515
620 


ph44585 on D330-44585-7600 with DISTILLER57321.516
621 


ph44585 on D330-44585-7600 with DISTILLER57321.517
622 


ph44585 on D330-44585-7600 with DISTILLER57321.518
623 


ph44585 on D330-44585-7600 with DISTILLER57321.519
624 


ph44585 on D330-44585-7600 with DISTILLER57321.520
625 


ph44585 on D330-44585-7600 with DISTILLER57321.521
626 


ph44585 on D330-44585-7600 with DISTILLER57321.522
627 


ph44585 on D330-44585-7600 with DISTILLER57321.523
628 


ph44585 on D330-44585-7600 with DISTILLER57321.524
629 


ph44585 on D330-44585-7600 with DISTILLER57321.525
630 


ph44585 on D330-44585-7600 with DISTILLER57321.526
631 


ph44585 on D330-44585-7600 with DISTILLER57321.527
632 


ph44585 on D330-44585-7600 with DISTILLER57321.528
633 


ph44585 on D330-44585-7600 with DISTILLER57321.529
634 


ph44585 on D330-44585-7600 with DISTILLER57321.530
635 


ph44585 on D330-44585-7600 with DISTILLER57321.531
636 


ph44585 on D330-44585-7600 with DISTILLER57321.532
637 


ph44585 on D330-44585-7600 with DISTILLER57321.533
638 


ph44585 on D330-44585-7600 with DISTILLER57321.534
639 


ph44585 on D330-44585-7600 with DISTILLER57321.535
640 


ph44585 on D330-44585-7600 with DISTILLER57321.536
641 


ph44585 on D330-44585-7600 with DISTILLER57321.537
642 


ph44585 on D330-44585-7600 with DISTILLER57321.538
643 


ph44585 on D330-44585-7600 with DISTILLER57321.539
644 


ph44585 on D330-44585-7600 with DISTILLER57321.540
645 


ph44585 on D330-44585-7600 with DISTILLER57321.541
646 


ph44585 on D330-44585-7600 with DISTILLER57321.542
647 


ph44585 on D330-44585-7600 with DISTILLER57321.543
648 


ph44585 on D330-44585-7600 with DISTILLER57321.544
649 


ph44585 on D330-44585-7600 with DISTILLER57321.545
650 


ph44585 on D330-44585-7600 with DISTILLER57321.546
651 


ph44585 on D330-44585-7600 with DISTILLER57321.547
652 


ph44585 on D330-44585-7600 with DISTILLER57321.548
653 


ph44585 on D330-44585-7600 with DISTILLER57321.549
654 


ph44585 on D330-44585-7600 with DISTILLER57321.550
655 


ph44585 on D330-44585-7600 with DISTILLER57321.551
656 


ph44585 on D330-44585-7600 with DISTILLER57321.552
657 


ph44585 on D330-44585-7600 with DISTILLER57321.553
658 


ph44585 on D330-44585-7600 with DISTILLER57321.554
659 


ph44585 on D330-44585-7600 with DISTILLER57321.555
660 


ph44585 on D330-44585-7600 with DISTILLER57321.556
661 


ph44585 on D330-44585-7600 with DISTILLER57321.557
662 


ph44585 on D330-44585-7600 with DISTILLER57321.558
663 


ph44585 on D330-44585-7600 with DISTILLER57321.559
664 


ph44585 on D330-44585-7600 with DISTILLER57321.560
665 


ph44585 on D330-44585-7600 with DISTILLER57321.561
666 


ph44585 on D330-44585-7600 with DISTILLER57321.562
667 


ph44585 on D330-44585-7600 with DISTILLER57321.563
668 


ph44585 on D330-44585-7600 with DISTILLER57321.564
669 


ph44585 on D330-44585-7600 with DISTILLER57321.565
670 


ph44585 on D330-44585-7600 with DISTILLER57321.566
671 


ph44585 on D330-44585-7600 with DISTILLER57321.567
672 


ph44585 on D330-44585-7600 with DISTILLER57321.568
673 


ph44585 on D330-44585-7600 with DISTILLER57321.569
674 


ph44585 on D330-44585-7600 with DISTILLER57321.570
675 


ph44585 on D330-44585-7600 with DISTILLER57321.571
676 


ph44585 on D330-44585-7600 with DISTILLER57321.572
677 


ph44585 on D330-44585-7600 with DISTILLER57321.573
678 


ph44585 on D330-44585-7600 with DISTILLER57321.574
679 


ph44585 on D330-44585-7600 with DISTILLER57321.575
680 


ph44585 on D330-44585-7600 with DISTILLER57321.576
681 


ph44585 on D330-44585-7600 with DISTILLER57321.577
682 


ph44585 on D330-44585-7600 with DISTILLER57321.578
683 


ph44585 on D330-44585-7600 with DISTILLER57321.579
684 


ph44585 on D330-44585-7600 with DISTILLER57321.580
685 


ph44585 on D330-44585-7600 with DISTILLER57321.581
686 


ph44585 on D330-44585-7600 with DISTILLER57321.582
687 


ph44585 on D330-44585-7600 with DISTILLER57321.583
688 


ph44585 on D330-44585-7600 with DISTILLER57321.584
689 


ph44585 on D330-44585-7600 with DISTILLER57321.585
690 


ph44585 on D330-44585-7600 with DISTILLER57321.586
691 


ph44585 on D330-44585-7600 with DISTILLER57321.587
692 


ph44585 on D330-44585-7600 with DISTILLER57321.588
693 


ph44585 on D330-44585-7600 with DISTILLER57321.589
694 


ph44585 on D330-44585-7600 with DISTILLER57321.590
695 


ph44585 on D330-44585-7600 with DISTILLER57321.591
696 


ph44585 on D330-44585-7600 with DISTILLER57321.592
697 


ph44585 on D330-44585-7600 with DISTILLER57321.593
698 


ph44585 on D330-44585-7600 with DISTILLER57321.594
699 


ph44585 on D330-44585-7600 with DISTILLER57321.595
700 


ph44585 on D330-44585-7600 with DISTILLER57321.596
701 


ph44585 on D330-44585-7600 with DISTILLER57321.597
702 


ph44585 on D330-44585-7600 with DISTILLER57321.598
703 


ph44585 on D330-44585-7600 with DISTILLER57321.599
704 


ph44585 on D330-44585-7600 with DISTILLER57321.600
705 


ph44585 on D330-44585-7600 with DISTILLER57321.601
706 


ph44585 on D330-44585-7600 with DISTILLER57321.602
707 


ph44585 on D330-44585-7600 with DISTILLER57321.603
708 


ph44585 on D330-44585-7600 with DISTILLER57321.604
709 


ph44585 on D330-44585-7600 with DISTILLER57321.605
710 


ph44585 on D330-44585-7600 with DISTILLER57321.606
711 


ph44585 on D330-44585-7600 with DISTILLER57321.607
712 


ph44585 on D330-44585-7600 with DISTILLER57321.608
713 


ph44585 on D330-44585-7600 with DISTILLER57321.609
714 


ph44585 on D330-44585-7600 with DISTILLER57321.610
715 


ph44585 on D330-44585-7600 with DISTILLER57321.611
716 


ph44585 on D330-44585-7600 with DISTILLER57321.612
717 


ph44585 on D330-44585-7600 with DISTILLER57321.613
718 


ph44585 on D330-44585-7600 with DISTILLER57321.614
719 


ph44585 on D330-44585-7600 with DISTILLER57321.615
720 


ph44585 on D330-44585-7600 with DISTILLER57321.616
721 


ph44585 on D330-44585-7600 with DISTILLER57321.617
722 


ph44585 on D330-44585-7600 with DISTILLER57321.618
723 


ph44585 on D330-44585-7600 with DISTILLER57321.619
724 


ph44585 on D330-44585-7600 with DISTILLER57321.620
725 


ph44585 on D330-44585-7600 with DISTILLER57321.621
726 


ph44585 on D330-44585-7600 with DISTILLER57321.622
727 


ph44585 on D330-44585-7600 with DISTILLER57321.623
728 


ph44585 on D330-44585-7600 with DISTILLER57321.624
729 


ph44585 on D330-44585-7600 with DISTILLER57321.625
730 


ph44585 on D330-44585-7600 with DISTILLER57321.626
731 


ph44585 on D330-44585-7600 with DISTILLER57321.627
732 


ph44585 on D330-44585-7600 with DISTILLER57321.628
733 


ph44585 on D330-44585-7600 with DISTILLER57321.629
734 


ph44585 on D330-44585-7600 with DISTILLER57321.630
735 


ph44585 on D330-44585-7600 with DISTILLER57321.631
736 


ph44585 on D330-44585-7600 with DISTILLER57321.632
737 


ph44585 on D330-44585-7600 with DISTILLER57321.633
738 


ph44585 on D330-44585-7600 with DISTILLER57321.634
739 


ph44585 on D330-44585-7600 with DISTILLER57321.635
740 


ph44585 on D330-44585-7600 with DISTILLER57321.636
741 


ph44585 on D330-44585-7600 with DISTILLER57321.637
742 


ph44585 on D330-44585-7600 with DISTILLER57321.638
743 


ph44585 on D330-44585-7600 with DISTILLER57321.639
744 


ph44585 on D330-44585-7600 with DISTILLER57321.640
745 


ph44585 on D330-44585-7600 with DISTILLER57321.641
746 


ph44585 on D330-44585-7600 with DISTILLER57321.642
747 


ph44585 on D330-44585-7600 with DISTILLER57321.643
748 


ph44585 on D330-44585-7600 with DISTILLER57321.644
749 


ph44585 on D330-44585-7600 with DISTILLER57321.645
750 


ph44585 on D330-44585-7600 with DISTILLER57321.646
751 


ph44585 on D330-44585-7600 with DISTILLER57321.647
752 


ph44585 on D330-44585-7600 with DISTILLER57321.648
753 


ph44585 on D330-44585-7600 with DISTILLER57321.649
754 


ph44585 on D330-44585-7600 with DISTILLER57321.650
755 


ph44585 on D330-44585-7600 with DISTILLER57321.651
756 


ph44585 on D330-44585-7600 with DISTILLER57321.652
757 


ph44585 on D330-44585-7600 with DISTILLER57321.653
758 


ph44585 on D330-44585-7600 with DISTILLER57321.654
759 


ph44585 on D330-44585-7600 with DISTILLER57321.655
760 


ph44585 on D330-44585-7600 with DISTILLER57321.656
761 


ph44585 on D330-44585-7600 with DISTILLER57321.657
762 


ph44585 on D330-44585-7600 with DISTILLER57321.658
763 


ph44585 on D330-44585-7600 with DISTILLER57321.659
764 


ph44585 on D330-44585-7600 with DISTILLER57321.660
765 


ph44585 on D330-44585-7600 with DISTILLER57321.661
766 


ph44585 on D330-44585-7600 with DISTILLER57321.662
767 


ph44585 on D330-44585-7600 with DISTILLER57321.663
768 


ph44585 on D330-44585-7600 with DISTILLER57321.664
769 


ph44585 on D330-44585-7600 with DISTILLER57321.665
770 


ph44585 on D330-44585-7600 with DISTILLER57321.666
771 


ph44585 on D330-44585-7600 with DISTILLER57321.667
772 


ph44585 on D330-44585-7600 with DISTILLER57321.668
773 


ph44585 on D330-44585-7600 with DISTILLER57321.669
774 


ph44585 on D330-44585-7600 with DISTILLER57321.670
775 


ph44585 on D330-44585-7600 with DISTILLER57321.671
776 


ph44585 on D330-44585-7600 with DISTILLER57321.672
777 


ph44585 on D330-44585-7600 with DISTILLER57321.673
778 


ph44585 on D330-44585-7600 with DISTILLER57321.674
779 


ph44585 on D330-44585-7600 with DISTILLER57321.675
780 


ph44585 on D330-44585-7600 with DISTILLER57321.676
781 


ph44585 on D330-44585-7600 with DISTILLER57321.677
782 


ph44585 on D330-44585-7600 with DISTILLER57321.678
783 


ph44585 on D330-44585-7600 with DISTILLER57321.679
784 


ph44585 on D330-44585-7600 with DISTILLER57321.680
785 


ph44585 on D330-44585-7600 with DISTILLER57321.681
786 


ph44585 on D330-44585-7600 with DISTILLER57321.682
787 


ph44585 on D330-44585-7600 with DISTILLER57321.683
788 


ph44585 on D330-44585-7600 with DISTILLER57321.684
789 


ph44585 on D330-44585-7600 with DISTILLER57321.685
790 


ph44585 on D330-44585-7600 with DISTILLER57321.686
791 


ph44585 on D330-44585-7600 with DISTILLER57321.687
792 


ph44585 on D330-44585-7600 with DISTILLER57321.688
793 


ph44585 on D330-44585-7600 with DISTILLER57321.689
794 


ph44585 on D330-44585-7600 with DISTILLER57321.690
795 


ph44585 on D330-44585-7600 with DISTILLER57321.691
796 


ph44585 on D330-44585-7600 with DISTILLER57321.692
797 


ph44585 on D330-44585-7600 with DISTILLER57321.693
798 


ph44585 on D330-44585-7600 with DISTILLER57321.694
799 


ph44585 on D330-44585-7600 with DISTILLER57321.695
800 


ph44585 on D330-44585-7600 with DISTILLER57321.696
801 


ph44585 on D330-44585-7600 with DISTILLER57321.697
802 


ph44585 on D330-44585-7600 with DISTILLER57321.698
803 


ph44585 on D330-44585-7600 with DISTILLER57321.699
804 


ph44585 on D330-44585-7600 with DISTILLER57321.700
805 


ph44585 on D330-44585-7600 with DISTILLER57321.701
806 


ph44585 on D330-44585-7600 with DISTILLER57321.702
807 


ph44585 on D330-44585-7600 with DISTILLER57321.703
808 


ph44585 on D330-44585-7600 with DISTILLER57321.704
809 


ph44585 on D330-44585-7600 with DISTILLER57321.705
810 


ph44585 on D330-44585-7600 with DISTILLER57321.706
811 


ph44585 on D330-44585-7600 with DISTILLER57321.707
812 


ph44585 on D330-44585-7600 with DISTILLER57321.708
813 


ph44585 on D330-44585-7600 with DISTILLER57321.709
814 


ph44585 on D330-44585-7600 with DISTILLER57321.710
815 


ph44585 on D330-44585-7600 with DISTILLER57321.711
816 


ph44585 on D330-44585-7600 with DISTILLER57321.712
817 


ph44585 on D330-44585-7600 with DISTILLER57321.713
818 


ph44585 on D330-44585-7600 with DISTILLER57321.714
819 


ph44585 on D330-44585-7600 with DISTILLER57321.715
820 


ph44585 on D330-44585-7600 with DISTILLER57321.716
821 


ph44585 on D330-44585-7600 with DISTILLER57321.717
822 


ph44585 on D330-44585-7600 with DISTILLER57321.718
823 


ph44585 on D330-44585-7600 with DISTILLER57321.719
824 


ph44585 on D330-44585-7600 with DISTILLER57321.720
825 


ph44585 on D330-44585-7600 with DISTILLER57321.721
826 


ph44585 on D330-44585-7600 with DISTILLER57321.722
827 


ph44585 on D330-44585-7600 with DISTILLER57321.723
828 


ph44585 on D330-44585-7600 with DISTILLER57321.724
829 


ph44585 on D330-44585-7600 with DISTILLER57321.725
830 


ph44585 on D330-44585-7600 with DISTILLER57321.726
831 


ph44585 on D330-44585-7600 with DISTILLER57321.727
832 


ph44585 on D330-44585-7600 with DISTILLER57321.728
833 


ph44585 on D330-44585-7600 with DISTILLER57321.729
834 


ph44585 on D330-44585-7600 with DISTILLER57321.730
835 


ph44585 on D330-44585-7600 with DISTILLER57321.731
836 


ph44585 on D330-44585-7600 with DISTILLER57321.732
837 


ph44585 on D330-44585-7600 with DISTILLER57321.733
838 


ph44585 on D330-44585-7600 with DISTILLER57321.734
839 


ph44585 on D330-44585-7600 with DISTILLER57321.735
840 


ph44585 on D330-44585-7600 with DISTILLER57321.736
841 


ph44585 on D330-44585-7600 with DISTILLER57321.737
842 


ph44585 on D330-44585-7600 with DISTILLER57321.738
843 


ph44585 on D330-44585-7600 with DISTILLER57321.739
844 


ph44585 on D330-44585-7600 with DISTILLER57321.740
845 


ph44585 on D330-44585-7600 with DISTILLER57321.741
846 


ph44585 on D330-44585-7600 with DISTILLER57321.742
847 


ph44585 on D330-44585-7600 with DISTILLER57321.743
848 


ph44585 on D330-44585-7600 with DISTILLER57321.744
849 


ph44585 on D330-44585-7600 with DISTILLER57321.745
850 


ph44585 on D330-44585-7600 with DISTILLER57321.746
851 


ph44585 on D330-44585-7600 with DISTILLER57321.747
852 


ph44585 on D330-44585-7600 with DISTILLER57321.748
853 


ph44585 on D330-44585-7600 with DISTILLER57321.749
854 


ph44585 on D330-44585-7600 with DISTILLER57321.750
855 


ph44585 on D330-44585-7600 with DISTILLER57321.751
856 


ph44585 on D330-44585-7600 with DISTILLER57321.752
857 


ph44585 on D330-44585-7600 with DISTILLER57321.753
858 


ph44585 on D330-44585-7600 with DISTILLER57321.754
859 


ph44585 on D330-44585-7600 with DISTILLER57321.755
860 


ph44585 on D330-44585-7600 with DISTILLER57321.756
861 


ph44585 on D330-44585-7600 with DISTILLER57321.757
862 


ph44585 on D330-44585-7600 with DISTILLER57321.758
863 


ph44585 on D330-44585-7600 with DISTILLER57321.759
864 


ph44585 on D330-44585-7600 with DISTILLER57321.760
865 


ph44585 on D330-44585-7600 with DISTILLER57321.761
866 


ph44585 on D330-44585-7600 with DISTILLER57321.762
867 


ph44585 on D330-44585-7600 with DISTILLER57321.763
868 


ph44585 on D330-44585-7600 with DISTILLER57321.764
869 


ph44585 on D330-44585-7600 with DISTILLER57321.765
870 


ph44585 on D330-44585-7600 with DISTILLER57321.766
871 


ph44585 on D330-44585-7600 with DISTILLER57321.767
872 


ph44585 on D330-44585-7600 with DISTILLER57321.768
873 


ph44585 on D330-44585-7600 with DISTILLER57321.769
874 


ph44585 on D330-44585-7600 with DISTILLER57321.770
875 


ph44585 on D330-44585-7600 with DISTILLER57321.771
876 


ph44585 on D330-44585-7600 with DISTILLER57321.772
877 


ph44585 on D330-44585-7600 with DISTILLER57321.773
878 


ph44585 on D330-44585-7600 with DISTILLER57321.774
879 


ph44585 on D330-44585-7600 with DISTILLER57321.775
880 


ph44585 on D330-44585-7600 with DISTILLER57321.776
881 


ph44585 on D330-44585-7600 with DISTILLER57321.777
882 


ph44585 on D330-44585-7600 with DISTILLER57321.778
883 


ph44585 on D330-44585-7600 with DISTILLER57321.779
884 


ph44585 on D330-44585-7600 with DISTILLER57321.780
885 


ph44585 on D330-44585-7600 with DISTILLER57321.781
886 


ph44585 on D330-44585-7600 with DISTILLER57321.782
887 


ph44585 on D330-44585-7600 with DISTILLER57321.783
888 


ph44585 on D330-44585-7600 with DISTILLER57321.784
889 


ph44585 on D330-44585-7600 with DISTILLER57321.785
890 


ph44585 on D330-44585-7600 with DISTILLER57321.786
891 


ph44585 on D330-44585-7600 with DISTILLER57321.787
892 


ph44585 on D330-44585-7600 with DISTILLER57321.788
893 


ph44585 on D330-44585-7600 with DISTILLER57321.789
894 


ph44585 on D330-44585-7600 with DISTILLER57321.790
895 


ph44585 on D330-44585-7600 with DISTILLER57321.791
896 


ph44585 on D330-44585-7600 with DISTILLER57321.792
897 


ph44585 on D330-44585-7600 with DISTILLER57321.793
898 


ph44585 on D330-44585-7600 with DISTILLER57321.794
899 


ph44585 on D330-44585-7600 with DISTILLER57321.795
900 


ph44585 on D330-44585-7600 with DISTILLER57321.796
901 


ph44585 on D330-44585-7600 with DISTILLER57321.797
902 


ph44585 on D330-44585-7600 with DISTILLER57321.798
903 


ph44585 on D330-44585-7600 with DISTILLER57321.799
904 


ph44585 on D330-44585-7600 with DISTILLER57321.800
905 


ph44585 on D330-44585-7600 with DISTILLER57321.801
906 


ph44585 on D330-44585-7600 with DISTILLER57321.802
907 


ph44585 on D330-44585-7600 with DISTILLER57321.803
908 


ph44585 on D330-44585-7600 with DISTILLER57321.804
909 


ph44585 on D330-44585-7600 with DISTILLER57321.805
910 


ph44585 on D330-44585-7600 with DISTILLER57321.806
911 


ph44585 on D330-44585-7600 with DISTILLER57321.807
912 


ph44585 on D330-44585-7600 with DISTILLER57321.808
913 


ph44585 on D330-44585-7600 with DISTILLER57321.809
914 


ph44585 on D330-44585-7600 with DISTILLER57321.810
915 


ph44585 on D330-44585-7600 with DISTILLER57321.811
916 


ph44585 on D330-44585-7600 with DISTILLER57321.812
917 


ph44585 on D330-44585-7600 with DISTILLER57321.813
918 


ph44585 on D330-44585-7600 with DISTILLER57321.814
919 


ph44585 on D330-44585-7600 with DISTILLER57321.815
920 


ph44585 on D330-44585-7600 with DISTILLER57321.816
921 


ph44585 on D330-44585-7600 with DISTILLER57321.817
922 


ph44585 on D330-44585-7600 with DISTILLER57321.818
923 


ph44585 on D330-44585-7600 with DISTILLER57321.819
924 


ph44585 on D330-44585-7600 with DISTILLER57321.820
925 


ph44585 on D330-44585-7600 with DISTILLER57321.821
926 


ph44585 on D330-44585-7600 with DISTILLER57321.822
927 


ph44585 on D330-44585-7600 with DISTILLER57321.823
928 


ph44585 on D330-44585-7600 with DISTILLER57321.824
929 


ph44585 on D330-44585-7600 with DISTILLER57321.825
930 


ph44585 on D330-44585-7600 with DISTILLER57321.826
931 


ph44585 on D330-44585-7600 with DISTILLER57321.827
932 


ph44585 on D330-44585-7600 with DISTILLER57321.828
933 


ph44585 on D330-44585-7600 with DISTILLER57321.829
934 


ph44585 on D330-44585-7600 with DISTILLER57321.830
935 


ph44585 on D330-44585-7600 with DISTILLER57321.831
936 


ph44585 on D330-44585-7600 with DISTILLER57321.832
937 


ph44585 on D330-44585-7600 with DISTILLER57321.833
938 


ph44585 on D330-44585-7600 with DISTILLER57321.834
939 


ph44585 on D330-44585-7600 with DISTILLER57321.835
940 


ph44585 on D330-44585-7600 with DISTILLER57321.836
941 


ph44585 on D330-44585-7600 with DISTILLER57321.837
942 


ph44585 on D330-44585-7600 with DISTILLER57321.838
943 


ph44585 on D330-44585-7600 with DISTILLER57321.839
944 


ph44585 on D330-44585-7600 with DISTILLER57321.840
945 


ph44585 on D330-44585-7600 with DISTILLER57321.841
946 


ph44585 on D330-44585-7600 with DISTILLER57321.842
947 


ph44585 on D330-44585-7600 with DISTILLER57321.843
948 


ph44585 on D330-44585-7600 with DISTILLER57321.844
949 


ph44585 on D330-44585-7600 with DISTILLER57321.845
950 


ph44585 on D330-44585-7600 with DISTILLER57321.846
951 


ph44585 on D330-44585-7600 with DISTILLER57321.847
952 


ph44585 on D330-44585-7600 with DISTILLER57321.848
953 


ph44585 on D330-44585-7600 with DISTILLER57321.849
954 


ph44585 on D330-44585-7600 with DISTILLER57321.850
955 


ph44585 on D330-44585-7600 with DISTILLER57321.851
956 


ph44585 on D330-44585-7600 with DISTILLER57321.852
957 


ph44585 on D330-44585-7600 with DISTILLER57321.853
958 


ph44585 on D330-44585-7600 with DISTILLER57321.854
959 


ph44585 on D330-44585-7600 with DISTILLER57321.855
960 


ph44585 on D330-44585-7600 with DISTILLER57321.856
961 


ph44585 on D330-44585-7600 with DISTILLER57321.857
962 


ph44585 on D330-44585-7600 with DISTILLER57321.858
963 


ph44585 on D330-44585-7600 with DISTILLER57321.859
964 


ph44585 on D330-44585-7600 with DISTILLER57321.860
965 


ph44585 on D330-44585-7600 with DISTILLER57321.861
966 


ph44585 on D330-44585-7600 with DISTILLER57321.862
967 


ph44585 on D330-44585-7600 with DISTILLER57321.863
968 


ph44585 on D330-44585-7600 with DISTILLER57321.864
969 


ph44585 on D330-44585-7600 with DISTILLER57321.865
970 


ph44585 on D330-44585-7600 with DISTILLER57321.866
971 


ph44585 on D330-44585-7600 with DISTILLER57321.867
972 


ph44585 on D330-44585-7600 with DISTILLER57321.868
973 


ph44585 on D330-44585-7600 with DISTILLER57321.869
974 


ph44585 on D330-44585-7600 with DISTILLER57321.870
975 


ph44585 on D330-44585-7600 with DISTILLER57321.871
976 


ph44585 on D330-44585-7600 with DISTILLER57321.872
977 


ph44585 on D330-44585-7600 with DISTILLER57321.873
978 


ph44585 on D330-44585-7600 with DISTILLER57321.874
979 


ph44585 on D330-44585-7600 with DISTILLER57321.875
980 


ph44585 on D330-44585-7600 with DISTILLER57321.876
981 


ph44585 on D330-44585-7600 with DISTILLER57321.877
982 


ph44585 on D330-44585-7600 with DISTILLER57321.878
983 


ph44585 on D330-44585-7600 with DISTILLER57321.879
984 


ph44585 on D330-44585-7600 with DISTILLER57321.880
985 


ph44585 on D330-44585-7600 with DISTILLER57321.881
986 


ph44585 on D330-44585-7600 with DISTILLER57321.882
987 


ph44585 on D330-44585-7600 with DISTILLER57321.883
988 


ph44585 on D330-44585-7600 with DISTILLER57321.884
989 


ph44585 on D330-44585-7600 with DISTILLER57321.885
990 


ph44585 on D330-44585-7600 with DISTILLER57321.886
991 


ph44585 on D330-44585-7600 with DISTILLER57321.887
992 


ph44585 on D330-44585-7600 with DISTILLER57321.888
993 


ph44585 on D330-44585-7600 with DISTILLER57321.889
994 


ph44585 on D330-44585-7600 with DISTILLER57321.890
995 


ph44585 on D330-44585-7600 with DISTILLER57321.891
996 


ph44585 on D330-44585-7600 with DISTILLER57321.892
997 


ph44585 on D330-44585-7600 with DISTILLER57321.893
998 


ph44585 on D330-44585-7600 with DISTILLER57321.894
999 


ph44585 on D330-44585-7600 with DISTILLER57321.895
1000 


ph44585 on D330-44585-7600 with DISTILLER57321.896
1001 


ph44585 on D330-44585-7600 with DISTILLER57321.897
1002 


ph44585 on D330-44585-7600 with DISTILLER57321.898
1003 


ph44585 on D330-44585-7600 with DISTILLER57321.899
1004 


ph44585 on D330-44585-7600 with DISTILLER57321.900
1005 


ph44585 on D330-44585-7600 with DISTILLER57321.901
1006 


ph44585 on D330-44585-7600 with DISTILLER57321.902
1007 


ph44585 on D330-44585-7600 with DISTILLER57321.903
1008 


ph44585 on D330-44585-7600 with DISTILLER57321.904
1009 


ph44585 on D330-44585-7600 with DISTILLER57321.905
1010 


ph44585 on D330-44585-7600 with DISTILLER57321.906
1011 


ph44585 on D330-44585-7600 with DISTILLER57321.907
1012 


ph44585 on D330-44585-7600 with DISTILLER57321.908
1013 


ph44585 on D330-44585-7600 with DISTILLER57321.909
1014 


ph44585 on D330-44585-7600 with DISTILLER57321.910
1015 


ph44585 on D330-44585-7600 with DISTILLER57321.911
1016 


ph44585 on D330-44585-7600 with DISTILLER57321.912
1017 


ph44585 on D330-44585-7600 with DISTILLER57321.913
1018 


ph44585 on D330-44585-7600 with DISTILLER57321.914
1019 


ph44585 on D330-44585-7600 with DISTILLER57321.915
1020 


ph44585 on D330-44585-7600 with DISTILLER57321.916
1021 


ph44585 on D330-44585-7600 with DISTILLER57321.917
1022 


ph44585 on D330-44585-7600 with DISTILLER57321.918
1023 


ph44585 on D330-44585-7600 with DISTILLER57321.919
1024 


ph44585 on D330-44585-7600 with DISTILLER57321.920
1025 


ph44585 on D330-44585-7600 with DISTILLER57321.921
1026 


ph44585 on D330-44585-7600 with DISTILLER57321.922
1027 


ph44585 on D330-44585-7600 with DISTILLER57321.923
1028 


ph44585 on D330-44585-7600 with DISTILLER57321.924
1029 


ph44585 on D330-44585-7600 with DISTILLER57321.925
1030 


ph44585 on D330-44585-7600 with DISTILLER57321.926
1031 


ph44585 on D330-44585-7600 with DISTILLER57321.927
1032 


ph44585 on D330-44585-7600 with DISTILLER57321.928
1033 


ph44585 on D330-44585-7600 with DISTILLER57321.929
1034 


ph44585 on D330-44585-7600 with DISTILLER57321.930
1035 


ph44585 on D330-44585-7600 with DISTILLER57321.931
1036 


ph44585 on D330-44585-7600 with DISTILLER57321.932
1037 


ph44585 on D330-44585-7600 with DISTILLER57321.933
1038 


ph44585 on D330-44585-7600 with DISTILLER57321.934
1039 


ph44585 on D330-44585-7600 with DISTILLER57321.935
1040 


ph44585 on D330-44585-7600 with DISTILLER57321.936
1041 


ph44585 on D330-44585-7600 with DISTILLER57321.937
1042 


ph44585 on D330-44585-7600 with DISTILLER57321.938
1043 


ph44585 on D330-44585-7600 with DISTILLER57321.939
1044 


ph44585 on D330-44585-7600 with DISTILLER57321.940
1045 


ph44585 on D330-44585-7600 with DISTILLER57321.941
1046 


ph44585 on D330-44585-7600 with DISTILLER57321.942
1047 


ph44585 on D330-44585-7600 with DISTILLER57321.943
1048 


ph44585 on D330-44585-7600 with DISTILLER57321.944
1049 


ph44585 on D330-44585-7600 with DISTILLER57321.945
1050 


ph44585 on D330-44585-7600 with DISTILLER57321.946
1051 


ph44585 on D330-44585-7600 with DISTILLER57321.947
1052 


ph44585 on D330-44585-7600 with DISTILLER57321.948
1053 


ph44585 on D330-44585-7600 with DISTILLER57321.949
1054 


ph44585 on D330-44585-7600 with DISTILLER57321.950
1055 


ph44585 on D330-44585-7600 with DISTILLER57321.951
1056 


ph44585 on D330-44585-7600 with DISTILLER57321.952
1057 


ph44585 on D330-44585-7600 with DISTILLER57321.953
1058 


ph44585 on D330-44585-7600 with DISTILLER57321.954
1059 


ph44585 on D330-44585-7600 with DISTILLER57321.955
1060 


ph44585 on D330-44585-7600 with DISTILLER57321.956
1061 


ph44585 on D330-44585-7600 with DISTILLER57321.957
1062 


ph44585 on D330-44585-7600 with DISTILLER57321.958
1063 


ph44585 on D330-44585-7600 with DISTILLER57321.959
1064 


ph44585 on D330-44585-7600 with DISTILLER57321.960
1065 


ph44585 on D330-44585-7600 with DISTILLER57321.961
1066 


ph44585 on D330-44585-7600 with DISTILLER57321.962
1067 


ph44585 on D330-44585-7600 with DISTILLER57321.963
1068 


ph44585 on D330-44585-7600 with DISTILLER57321.964
1069 


ph44585 on D330-44585-7600 with DISTILLER57321.965
1070 


ph44585 on D330-44585-7600 with DISTILLER57321.966
1071 


ph44585 on D330-44585-7600 with DISTILLER57321.967
1072 


ph44585 on D330-44585-7600 with DISTILLER57321.968
1073 


ph44585 on D330-44585-7600 with DISTILLER57321.969
1074 


ph44585 on D330-44585-7600 with DISTILLER57321.970
1075 


ph44585 on D330-44585-7600 with DISTILLER57321.971
1076 


ph44585 on D330-44585-7600 with DISTILLER57321.972
1077 


ph44585 on D330-44585-7600 with DISTILLER57321.974
1078 


ph44585 on D330-44585-7600 with DISTILLER57321.975
1079 


ph44585 on D330-44585-7600 with DISTILLER57321.976
1080 


ph44585 on D330-44585-7600 with DISTILLER57321.977
1081 


ph44585 on D330-44585-7600 with DISTILLER57321.978
1082 


ph44585 on D330-44585-7600 with DISTILLER57321.979
1083 


ph44585 on D330-44585-7600 with DISTILLER57321.980
1084 


ph44585 on D330-44585-7600 with DISTILLER57321.981
1085 


ph44585 on D330-44585-7600 with DISTILLER57321.982
1086 


ph44585 on D330-44585-7600 with DISTILLER57321.983
1087 


ph44585 on D330-44585-7600 with DISTILLER57321.984
1088 


ph44585 on D330-44585-7600 with DISTILLER57321.985
1089 


ph44585 on D330-44585-7600 with DISTILLER57321.986
1090 


ph44585 on D330-44585-7600 with DISTILLER57321.987
1091 


ph44585 on D330-44585-7600 with DISTILLER57321.988
1092 


ph44585 on D330-44585-7600 with DISTILLER57321.989
1093 


ph44585 on D330-44585-7600 with DISTILLER57321.990
1094 


ph44585 on D330-44585-7600 with DISTILLER57321.991
1095 


ph44585 on D330-44585-7600 with DISTILLER57321.992
1096 


ph44585 on D330-44585-7600 with DISTILLER57321.993
1097 


ph44585 on D330-44585-7600 with DISTILLER57321.994
1098 


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1099 


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1100 


ph44585 on D330-44585-7600 with DISTILLER57321.997
1101 


ph44585 on D330-44585-7600 with DISTILLER57321.998
1102 


ph44585 on D330-44585-7600 with DISTILLER57321.999
1103 


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1104 


ph44585 on D330-44585-7600 with DISTILLER573211.001
1105 


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1106 


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1107 


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1108 


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1109 


ph44585 on D330-44585-7600 with DISTILLER573211.006
1110 


ph44585 on D330-44585-7600 with DISTILLER57321.973
1111 


ph44585 on D330-44585-7600 with DISTILLER573211.007
1112 


ph44585 on D330-44585-7600 with DISTILLER573211.008
1113 


ph44585 on D330-44585-7600 with DISTILLER573211.009
1114 


ph44585 on D330-44585-7600 with DISTILLER573211.010
1115 


ph44585 on D330-44585-7600 with DISTILLER573211.011
1116 


ph44585 on D330-44585-7600 with DISTILLER573211.012
1117 


ph44585 on D330-44585-7600 with DISTILLER573211.013
1118 


ph44585 on D330-44585-7600 with DISTILLER573211.014
1119 


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1120 


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1121 


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1122 


ph44585 on D330-44585-7600 with DISTILLER573211.017
1123 


ph44585 on D330-44585-7600 with DISTILLER573211.018
1124 


ph44585 on D330-44585-7600 with DISTILLER573211.019
1125 


ph44585 on D330-44585-7600 with DISTILLER573211.020
1126 


ph44585 on D330-44585-7600 with DISTILLER573211.021
1127 


ph44585 on D330-44585-7600 with DISTILLER573211.022
1128 


ph44585 on D330-44585-7600 with DISTILLER573211.023
1129 


ph44585 on D330-44585-7600 with DISTILLER573211.024
1130 


ph44585 on D330-44585-7600 with DISTILLER573211.025
1131 


ph44585 on D330-44585-7600 with DISTILLER573211.026
1132 


ph44585 on D330-44585-7600 with DISTILLER573211.027
1133 


ph44585 on D330-44585-7600 with DISTILLER573211.028
1134 


ph44585 on D330-44585-7600 with DISTILLER573211.029
1135 


ph44585 on D330-44585-7600 with DISTILLER573211.030
1136 


ph44585 on D330-44585-7600 with DISTILLER573211.031
1137 


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1138 


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1139 


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1140 


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1141 


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1142 


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1143 


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1144 


ph44585 on D330-44585-7600 with DISTILLER573211.039
1145 


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1146 


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1147 


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1148 


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1149 


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1150 


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1151 


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1152 


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1153 


ph44585 on D330-44585-7600 with DISTILLER573211.048
1154 


ph44585 on D330-44585-7600 with DISTILLER573211.049
1155 


ph44585 on D330-44585-7600 with DISTILLER573211.050
1156 


ph44585 on D330-44585-7600 with DISTILLER573211.051
1157 


ph44585 on D330-44585-7600 with DISTILLER573211.052
1158 


ph44585 on D330-44585-7600 with DISTILLER573211.053
1159 


ph44585 on D330-44585-7600 with DISTILLER573211.054
1160 


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1161 


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1162 


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1163 


ph44585 on D330-44585-7600 with DISTILLER573211.058
1164 


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1165 


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1166 


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1167 


ph44585 on D330-44585-7600 with DISTILLER573211.062
1168 


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1169 


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1170 


ph44585 on D330-44585-7600 with DISTILLER573211.065
1171 


ph44585 on D330-44585-7600 with DISTILLER573211.066
1172 


ph44585 on D330-44585-7600 with DISTILLER573211.067
1173 


ph44585 on D330-44585-7600 with DISTILLER573211.068
1174 


ph44585 on D330-44585-7600 with DISTILLER573211.069
1175 


ph44585 on D330-44585-7600 with DISTILLER573211.070
1176 


ph44585 on D330-44585-7600 with DISTILLER573211.071
1177 


ph44585 on D330-44585-7600 with DISTILLER573211.072
1178 


ph44585 on D330-44585-7600 with DISTILLER573211.073
1179 


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1180 


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1181 


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1182 


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1183 


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1184 


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1185 


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1186 


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1187 


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1188 


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1189 


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1190 


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1191 


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1192 


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1193 


ph44585 on D330-44585-7600 with DISTILLER573211.088
1194 


ph44585 on D330-44585-7600 with DISTILLER573211.089
1195 


ph44585 on D330-44585-7600 with DISTILLER573211.090
1196 


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1197 


ph44585 on D330-44585-7600 with DISTILLER573211.092
1198 


ph44585 on D330-44585-7600 with DISTILLER573211.093
1199 


ph44585 on D330-44585-7600 with DISTILLER573211.094
1200 


ph44585 on D330-44585-7600 with DISTILLER573211.096
1201 


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1202 


ph44585 on D330-44585-7600 with DISTILLER573211.098
1203 


ph44585 on D330-44585-7600 with DISTILLER573211.099
1204 


ph44585 on D330-44585-7600 with DISTILLER573211.100
1205 

Æ 


ph44585 on D330-44585-7600 with DISTILLER573211.101