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piggyback ratings reconsidered

The firms say that since first asked to rate securities based on subprime
loans more than a decade ago, they've done the best they could with the
data they've had. "The housing market has proven to be weaker than a
lot of expectations," says Warren Kornfeld, co-head of residential
mortgage-backed securities at Moody's. This summer, the firms
downgraded hundreds of mortgage bonds built on subprime mortgages.
They say those bonds represent only a small part of the subprime-mortgage

How Rating Firms' Calls Fueled Subprime Mess

By Aaron Lucchetti and Serena Ng
From The Wall Street Journal Online.

The subprime market has been lucrative for the credit-rating firms.
Compared with their traditional business of rating corporate bonds,
the firms get fees about twice as high when they rate a security
backed by a pool of home loans. The task is more complicated.
Moreover, through their collaboration with underwriters, the
rating companies can actually influence how many such securities
get created.

Moody's Investors Service took in around $3 billion from 2002 through
2006 for rating securities built from loans and other debt pools. This
"structured finance" -- which can involve student loans, credit-card
debt and other types of loans in addition to mortgages -- provided
44% of revenue last year for parent Moody's Corp. That was up
from 37% in 2002.

When Wall Street first began securitizing subprime loans, rating
firms leaned heavily on lenders and underwriters themselves for
historical data about how such loans perform. The underwriters,
in turn, assiduously tailored securities to meet the concerns of the
ratings agencies, say people familiar with the process. Underwriters,
these people say, would sometimes take their business to another
rating company if they couldn't get the rating they needed.

"It was always about shopping around" for higher ratings, says
Mark Adelson, a former Moody's managing director, although he
says Wall Street and mortgage firms called the process by other
names, like "best execution" or "maximizing value."

Executives at both ratings firms and underwriters say the
back-and-forth stopped short of bargaining over how to
construct securities or over the criteria used to rate them.
"We don't negotiate the criteria. We do have discussions,"
says Thomas Warrack, a managing director at S&P, which
is a unit of McGraw-Hill Cos. He says the communication
"contributes to the transparency" preferred by the market
and regulators.


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