Senate Hearings : S&P Steps Up

In the last statement listed on Banking Committee’s website, Vickie A. Tillman, Executive Vice President of Standard & Poor’s Credit Market Services, gave her views on the current controversy. She included a wonderful quotation from Eddy Wymeersch, Chairman of the Committee of European Securities Regulators and also Chairman of Belgium’s Banking and Financial Commission:

“The press and general opinion is saying it’s the fault of the credit rating agencies,” Eddy Wymeersch, chairman of Belgium’s Banking and Financial Commission watchdog told Reuters.

“Sorry, the ratings are just about the probability of default, nothing more. Now we have a liquidity crisis and not a solvency crisis,”

She then states that S&P has been rating Residential Mortgage Backed Securities (RMBS) for thirty years, with the following results:

Initial Rating % of Default
AAA 0.04
AA 0.24
A 0.33
BBB 1.09
BB 2.11
B 3.34

She then reiterates Moody’s testimony regarding the role of the Credit Rating Agency in it’s relationship with the Originators:

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 homeowners or evaluate whether making those loans was a good idea in the first place. Originators make loans and verify information provided by borrowers. They also appraise homes and make underwriting decisions. In turn, issuers and arrangers of mortgage-backed securities bundle those loans and perform due diligence. They similarly set transaction structures, identify potential buyers for the securities, and underwrite those securities. For the system to function properly, S&P relies, as it must, on these participants to fulfill their roles and obligations to verify and validate information before they pass it on to others, including S&P. Our role in the process is reaching an opinion as to how much cash we believe the underlying loans are likely to generate towards paying off the securities eventually issued by the pool. That is the relevant issue for assessing the creditworthiness of those securities.

There’s a lot in the presentation that repeats Moody’s testimony, or simply describes the S&P version of the same procedure, so I’ll skip over a lot of verbiage. Her major headings are:

  • The “Issuer Pays” Model Doesn Not Compromise the Independence and Objectivity of Our Ratings … this section includes a reference to a Fed Reserve paper Testing Conflicts of Interest at Bond Ratings Agencies with Market Anticipation: Evidence that Reputation Incentives Dominate.
  • S&P Does Not “Structure” Transactions … they talk, yes. This encourages transparency and predictability.
  • Credit Enhancement – How Securities Backed By Subprime Mortgages Can Recieve, and Merit, Investment Grade Ratings … I’m getting tired of this topic, but I suppose she had to ensure it was addressed
  • S&P Has Been Warning the Market, and Taking Action, in Response to Deterioration in the Subprime Market Since Early 2006 … listing¬†quite a few¬†publications.
  • Impact of the Credit Rating Agency Reform Act of 2006 … blah blah blah

So … she covered pretty much the same ground as Moody’s did.

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