Opinion ID: 216493
Heading Depth: 2
Heading Rank: 2

Heading: Rating Agencies' Alleged Role in the Offerings

Text: In the transactions described above, plaintiffs allege that the Rating Agencies, which ordinarily serve as passive evaluators of credit risk, exceeded their traditional roles by actively aiding in the structuring and securitization process. Specifically, plaintiffs allege that issuing banks engaged particular Rating Agencies through a ratings shopping process, whereby the Rating Agencies reviewed loan-level data for a mortgage pool and provided preliminary ratings. Union Compl. ¶ 66; Wyoming Compl. ¶ 200. The banks then negotiated with the Rating Agencies regarding the amount of credit enhancements and percentage of AAA certificates for each mortgage pool. By thus play[ing] the agencies off one another and choosing the agency offering the highest percentage of AAA certificates with the least amount of credit enhancements, the banks purportedly engender[ed] a race to the bottom in terms of rating quality. Union Compl. ¶ 170. During and after this negotiation, the Rating Agencies engaged in an iterative process with the banks, providing feedback on which combinations of loans and credit enhancements would generate particular ratings. Id. ¶ 177 (internal quotation marks and emphasis omitted); Wyoming Compl. ¶ 91 (internal quotation marks and emphasis omitted); Vaszurele Compl. ¶ 38 (internal quotation marks and emphasis omitted). In the course of this dialogue, issuers adjusted the certificates' structures until they achieved desired ratings. As one Moody's officer described the process: You start with a rating and build a deal around a rating. Union Compl. ¶ 176 (internal quotation marks and emphasis omitted); Wyoming Compl. ¶ 90 (internal quotation marks omitted); Vaszurele Compl. ¶ 38 (internal quotation marks and emphasis omitted). Plaintiffs submit that the Rating Agencies thus helped determine the composition of loan pools, the certificates' structures, and the amount and kinds of credit enhancement for particular tranches. Toward this end, the Rating Agencies allegedly provided their modeling tools to the banks' traders to help them pre-determine the combinations of credit enhancements and loans needed to achieve specific ratings. S & P's LEVELS or SPIRES models, and Moody's M-3 model, analyzed fifty to eighty different loan characteristics in estimating the number and extent of likely loan defaults. Based on these factors, the models calculated the amount of credit enhancement required for a specific pool of loans to receive a AAA rating. According to the Union Plaintiffs, LBHI used the modeling data in determining bidding prices for loans. Moody's and S & P also received loan-level files and advised Lehman on appropriate loan prices. The Rating Agencies, however, had purportedly failed to update their models to reflect accurately the higher risks of certain underlying loans, such as subprime, interest-only, and negative amortization mortgages. [2] The models also failed to account for deteriorating loan origination standards. As a result, plaintiffs complain that the certificates' AAA or investment-grade ratings did not accurately represent their risk.