problem -- clearly you knew... would hurt the moody's brand. >> this 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. >> that is the -- he said our whole business depends on this. >> that is why the performance of the subprime mortgage securities in particular -- particularly in 2006 and o- is frustrating to me as a ceo, among other reasons. >> i don't see why it would be frustrating. basically what happened was we had the housing market blow-up and, to know -- through no fault of our on, everything went south. there was nothing -- you have not identified a single thing that was going on in moody's that other than just you guys got caught in a bad, bad housing

market. not a bad business market, bad housing market. >> there are a number of things that in hindsight i wish we had done differently. absolutely. >> that is what -- really what i was trying to get at with the first question. what are some of the things, in hindsight you would have done differently? >> there are a number. i think at the macro level, we were insufficiently rigorous in thinking about trends in housing, at and -- an overall system level and even more importantly having thought about that, pushing that macroeconomic, macro housing per superdown into the rating committee deliberations. i think that -- >> how would you -- the system you laid out, kind of was a very -- as it was said, he said i

didn't have anything to do with the rating thing and your testimony is essentially -- how would you have done that? how would you have, in this system, been able to communicate down, you say, look we're not being rigorous enough in this analysis. what would mechanically -- do you send a memo to everybody and say, while we're doing this, let's look at these? >> what we are doing now, is a formal macro risk perspective, series, updated every six months. the -- this is done on a global basis, and, we are taking the relevant components of that macrorisk perspective and, the stress scenarios around that, and delivering those to not only, our own employees but 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 on much more heavily on work done by companies that we purchased back in i think late 2005, perhaps early 2006, moodyseconomy.com which provides housing analysis nationwide, having demographic and econometric analysis. >> anything else, anything other thing you think in retrospect. >> there are a number of things. >> what. >> in addition, we determined that we had to have more cros-disciplinary expertise in the rating committees. there are other elements, operating in the credit markets that may affect housing that bring different disciplines to bear and the ratings committee brings a richer perspective. we 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. and, there is a very long list and i'm -- >> that is good enough. ms. corbin, anything in retrospect you would have, you know, done differently? >> well, similarly to moody's, standard & poor's has taken increased steps in terms of governance and in terms of of including in their forecasts and ratings, elements of stability. and stability of ratings, the comparability... >> have you thought about the way you incentivize people within the organization? has that been a concern at all. >> historically, and i believe is the case today, analysts have never been incidentvised -- >> not analysts, talking about people from top to bottom in the organization, business part of the organization. >> it has always been at

standard & poor's, during my tenure has been about the analytical quality an independence of the ratings being first and foremost and not being compromised. >> i'm sorry. you didn't hear the first panel, because it was unanimous it stopped at some point -- and by the way, don't feel bad, the hearing we had last week, washington mutual exactly the same discussion went on, is it fair to say. >> people that were involved in it felt the incentives and disincentives were such within the organization that things were done that they wished they hadn't done and quality was overlooked and it was more about quantity than quality and is not just at standard & poor's and moody's and i'm sure we'll find from everything i can see, there was a kind of a things are going great, let's do it. we know what we're doing. let's get the stuff out the

door. so i'm just saying, it is of concern, that also, in washington mutual, the head of washington mutual had no idea it was going on while many people in the organization felt that that was going on. >> well, that is -- to the extent that that was, and again -- i think that it is important that -- and certainly was the case i believe at s&p is that they should have had the ability to raise those concerns with the management team, and, hopefully, those would have been addressed. >> and they did and they weren't. i think, you know, a lot of people think ceo pay makes americans so upset and i don't think -- i have my own opinion the ceo pay thing is, you know, the average pay, for ceos compared to the average working person is -- has grown quite exponentially. and people are concerned about that. but i think it is more that when these things happen, the idea

that a guy that -- one of the smartest people i ever met, robert reuben, someone of the smartest people i ever met, i'm not overstating that. smart from a standpoint of knowledge and politics and everything else, makes $30 million as a vice chairman of city group and said i didn't know there was a $49 billion bomb at the bottom of my business. it is just... i mean, that is what people are really upset about. about the pay but when these things are going on, down in their business, at these four -- seem to me, dedicated employees, are not disgruntled employees, they said it almost with like, they were as upset as anyone else and i know companies, people would be upset if they felt the brand was being hurt because people live it. but, do you want to comment on

bar-belling, the idea that fico scores, the way that you calculate a fico score and use averages allowed ne'er-do-wells to pick mortgages so they could take advantage of the... are you familiar with bar-belling. >> as far as bar-belling by taking strong and weak fico scores and averaging those out, we don't look at them on an average basis and bar-belling. >> and you never have. >> i don't believe. i don't think that would have achieved what someone might have wanted to achieve. >> and ms. corbett. >> i'm unfamiliar with the term. >> how about stated income loans, mr. mcdaniel you are familiar with what a stated income loan is aren't you. >> yes. >> and ms. corbett. >> yes. >> did you feel at any point,

there was like an explosion of stated income loans throughout the business with the explosion of the business, with the explosion of the stated income loans from the data we have there were many, many companies that were going, starting out as a small part of the business and, at any point were you concerned, is that part of calculation of the ratings there were a lot of stated income loans, in particular. >> that would be a credit factor for an analyst or rating committee to consider. >> do you know if any was, if it was. >> i have not participated in the rating committees but i would be extremely surprised if they hadn't. >> i would expect the same. >> okay. anyway, mr. chairman? sn>> 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, and 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 and the testimony this morning was very, very powerful about it and to look at a few of the exhibits, exhibit 3, first in your book, if you would. august 17th, 2004. we're preparing to meet with your group this week to discuss adjusting criteria for ratings c -- rating cdos of real estate assets. this weak, because of the ongoing threat of losing deals. now, that is a standard and poor's exhibit, august, 2004.

the ongoing threat of losing deals. then you ac loot the next exhibit. exhibit 2. the standard & poor's as well, we lost a huge rmbs deal to moody's due to the difference in the required credit support level, losing one or several deals due to criteria, but this is so significant it could have an impact on -- in the future deals. there is no way we can get back on this one but we need to address this now in preparation for future deals. exhibit 2. you look at exhibit 5, new rate

-- 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 subprime and alt-a numbers to 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. this this is contemporaneous, not looking in the rearview mirroror, benefit of hindsight. this is what is going on at the time. then you look at the testimony of mr. michelik, former analyst at moody's, testified the president of moody's and 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 investment bank, instead of the real customers, the investing public, nonetheless, what he says is, that a number of bankers complained to mr. clarkson, and mr. michalek was asking too many question and too thorough a review and wanted him removed from their deals and they got their wish. future deals. instead of rewarding mr. michalek for asking the probing questions and doing his job, he testified, mr. clarkson, suggested that he provide an explanation for what was -- 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, contemporaneous and is at the time.

then you've got a... another exhibit. exhibit 11. e-mail. may 2006. ubs banker writes to s&p, heard you guys are revising your residential mortgage backed securities rating methodology. getting very punitive on silent seconds, heard your ratings could be five notches back. gonna kill your residential business, may force us to do moody-fitch-only cdos and and s&p employee forwards the e-mail to a colleague and says, any truth to this and the colleague responds, we put out criteria 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 the significant amount of deals. god forbid we do something which bumps us off a significant amount of deals. so, you know, you can want to look backwards and, we all do, when mistakes are made, we love to say, hey, let's 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 exhibits. there was not downgrading of existing rmbs and cdos despite existing delinquencies, was you have to hold on to market share and analysts didn't have the data or 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? needed their business. now, you know, i want to... i have another -- other testimony, managers of the cdo, in cdo, gus harris told staff, if they lose market share they'll be fired. we have that testimony. contemporaneous testimony. were you troubled by it when you heard it? i don't know if you heard it all, but... >> as i said, no employee of moody's has ever been fired for market share issues. >> were they threat. >> no. >> any evidence market share drove ratings, have you look at these exhibits and listened to why just told you. >> as i testified early, ratings quality is paramount -- >> if we look -- >> supposed to be paramount. >> we look at other things that are relevant to running a

business and that include market share and, in particular, 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 is expressed in the rating i think is important. that is different from market share for financial purposes. >> are you surprised to hear the testimony and exhibits about the impact of market share at the time? >> well, let me say, mr. chairman, that, indeed, one of the things at standard & poor's, early on recognized to mitigate any pressure, if it came from externally, as some of the e-mails indicated, was really to separate the commercial from the analytical process, and, so, i think that

was important in terms of as it exists today in terms of the separation from the business, from the ratings business. 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 mack share do kleined, 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. >> if you look at exhibit 24-a, this is a moody's exhibit. when we talked about -- one we talked about before, market share by deal. count dropped to 94%. any lower -- lower than the 98-plus percent from prior quarters. any reason for concern? then you've got this exhibit,

24-b, look at that, mr. mcdaniel. i think that that exhibit is -- was put together by your chief credit officer, is that correct, mr. kimbel. >> yes. that it is correct. >> he says that he disputes the quality is king, and is risk due to pressure from bankers. and, analysts and managing directors are continuing pitch by bankers, issuers and investors, whose views can color credit judgment and sometimes improving and sometimes degrading it and we drink the kool-aid, coupled with strong internal emphasis on market share, coupled with strong internal emphasis on market share, and margin focus, this does constitute a risk to ratings quality. that is his analysis.

then he says, that i don't know if you follow what i was reading on page 2... continuing, analysts and mds are pitched by bankers, issuesers, investors, and this constitutes a risk to ratings quality. do you agree with that. >> as i had commented before, the observation that the -- our information sources all of -- oftentimes have points of view, whether issuers or investors, they are -- had the risk of causing us to think on the consensus bases 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. >> you say should operate from consensus. it says there is a strong internal emphasis on market share. >> yes, as i said, we have market -- >> what constitutes a risk to ratings quality. does your emphasis on market share constitute a risk to ratings quality. >> if we are not attentive. >> that is what he's saying, coupled with an emphasis, he's not saying if, he's saying coupled with an emphasis. with a strong internal emphasis on market share. this does constitute a risk to ratings quality. >> that is him. those are risks and they must be managed properly. so, that the ratings system is not compromised in any way. >> and it says coupled with a strong internal emphasis... and

you are saying, that there is no such coupling. >> i'm saying that that is a risk and must be managed properly so that the ratings are not compromised. >> and there is -- you say there is a strong internal emphasis on market share, you agree to that. >> i pay -- >> you pay attention to it. do you agree there is a strong internal emphasis on market share. >> i believe he thinks there is -- >> do you agree with him, did you agree when you read that. >> i believe that attention to market share is one thing we must pay attention to. in running the business. >> that is not my question. >> it's not as important as ratings quality, but, i pay attention to it, and i care about it. >> that wasn't my question. >> i'm... i apologize. >> let me try again. >> i'm trying to answer -- >> let me try again, was he right that there is a strong internal emphasis on market share? >> there is a strong internal

emphasis on market coverage. yes. >> you would not word it the way he does. >> i would not but i understand that, you know, market coverage and market share can be conflated. >> what. >> contemplated. -- conflated. >> does that mean confused? >> used interchangeably. >> you would not phrase that way. >> as i said i think the market coverage issue is the more important issue. >> did he prepare this at your request? >> i actually don't remember if he prepared it at my request or independently. but, i do remember receiving it. >> ms. corbett were you aware that... are you familiar with

the fbi report that came out in 2004 that said that mortgage fraud was becoming more prevale prevalent. >> i'm not aware of that particular report. >> were you aware that the fbi in '06 reported the number of suspicious activity reports surrounding mortgage fraud rose by 700%? >> again i'm not familiar with that specific report. >> and, in the period 2004 to 2006, were you aware of the growth of interest-only loans, you -- broad use of interest-only loans, do you know what i mean by interest-only loans. >> i believe so, yes. >> were you aware that there was a large use of interest-only loans during that period? >> 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. >> were you aware there was a large growth in the utilization of interest only loans, during that period? >> i am not aware of what the percentage of the growth... i

was aware those loans existed. >> were you aware that there was a large growth -- i'm not asking for a percentage. were you aware... >> i was aware that those were new products in the mark place, yes. >> were you aware in '04 to '06 of the growing use of no doc and low-doc loans. >> i am aware of that, yes. >> were you aware from 2004 to 2006 -- u.n. what silent seconds are? >> honestly, i do not. >> that's okay. i didn't know a few months ago, either, were you aware of the second lien, you know what second liens are -- second mortgages. >> i'm familiar with the term, yes. >> this is a standard & poor's,

an e-mail, exhibit 14... from richard koch to michael gutierrez. do you know who those folks are or were. >> no, i don't. >> there has been a rampant appraisal and underwriting fraud in the industry or quite some time, as pressure mounted, to feed the original machine. -- origination machine, would you agree there was great pressure to feed the origination machine? >> i'm not aware of this -- >> i know that, but in general were you aware there was a huge demand for mortgages to secure ties mortgages, were you aware -- >> certainly aware of the dprot in securitized mortgages. >> and the great demand for mortgages for that purpose.

>> and the demand from investors to invest -- >> and from wall street to securitize. >> yes. >> you were aware of that? >> yes. >> were you aware of exhibit 5, groan i asked you specifically or not. ms. corbett. version 6 could have 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 whether -- what your reaction is to that. >> you did not ask, but i think

they -- >> what do you think -- >> i'm not familiar with what the topic they are referring to. or the people who -- they are addressing. >> what is your reaction now that you read that, something that was -- would have been done at wise, could not be done because the writer, standard & poor's employee, had the -- to massage the subprime and alt-a numbers to preserve market share. what is your reaction, now that you read that? >> well, it is certainly troubling but, again, it is probably... in a larger context, i'm not sure what the subject might be addressing. but, to the extent that that was a concern i would expect that that would be reviewed and to the extent it wasn't addressed it should have been raised to my attention. >> the exhibit number 87 is the subject we talked about, with the earlier panel. there was a message from mrs. warner, exhibit number 87,

pleading for resources. short staffed. analyzers overwhelmed, exhibit 91. there are a number of exhibits that show an overwhelming shortage of staff to both do the ratings, but, also, to do the reviews. were you aware of that kind of short fall, staff, at that time? >> well, certainly, in early 2007, is 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. and as i understand, from the testimony, this group did receive the needed resources. >> that is not the part of the

testimony you finally acknowledged which is they were short of resources and tried say they shuffled back and forth and were short of resources. exhibit 90, mr. mcdaniel, look at exhibit 90. this is moody's. document from a moody's employee, january of '06. i think we need full functionality with m-3 the moody's model especially if we are to remain short staffed for another year. were you short staffed in january of '06? >> we -- >> were you aware of that? >> we had stress on our resources in this period. absolutely. >> and you were making pretty good profit at that time, weren't you? >> we were profitable, yes. >> and look at 91:another moody's employee, in may of '07, if you would, mr. mcdaniel.

>> i apologize. which exhibit? >> 91. >> third -- second paragraph. our analysts are overwhelmed... mr. kaczynski's e-mail. >> 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, and, 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. >> does moody's reevaluate

wholesale or just certain transactions? >> we monitor in our surveillance, all transactions. >> did you reevaluate an enti entire... entire, for instance an entire cdo or entire rmbs? >> i apologize, i'm not following... >> if you have a new metric, you have a new model, new -- that you are using to rate new securities, will you go back and use that model on existing securities? >> it would depend. >> you didn't retest the old deals, did you? >> in many cases, we do, in other cases, we do not. >> what about standard & poor's? >> they are two different

processes, one is a security -- 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 ratings. >> you didn't go and look at the entire rating, for an entire issue? >> every issue was -- >> in terms of the actual performance data. >> so you went back and used the new model or did you grandfather the old rating, which one. >> 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. >> so you didn't retest your old deals, you disclosed the new ratings in the marketplace. >> we disclosed the new criteria, and how it would

impact securities, that were to be rated going forward, that's correct. >> going forward. >> that's correct. >> is one of the reasons you didn't go back and apply your new model, which you now knew to the old deals, is because of shortage of resources, to do that? was that one of the reasons. >> no. >> was that one of reasons that you didn't do that, mr. mcdaniel, was that shortage of resources, when you didn't do that? >> the... there are a number of reasons, not to -- >> was that one of them? >> i don't believe it would be.

>> this is exhibit 62. this is a standard & poor's exhibit. 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 & poor's, and i do not know of a situation somewhere there were wholesale xhaings changes to existing ratings of the primary group change assumptions or instituted new criteria and the two major reasons, why we have taken this approach, is, one, lack of sufficient personnel resources. are you familiar with that document. >> no, i'm not.

i just reviewed it this week. >> this is not accurate? this is not true? you said that -- >> this is not my understanding of how securities were surveilled. >> okay. and if you look at exhibit 92-a, mr. mcdaniel... >> yes? >> this is a focus group associate survey, and if you look at page 3, you apparently were there, at a series of interviews and focus groups, if you look at that first batch and you look at the findings, most indicated that sfg business objectives included increasing market share, and/or coverage? do you see that? >> yes.

>> now, after your mass downgrades in 2007, during the last six months, moody's rated about 500 subprime rmbs securities and s&p rated over 700 and so you are still allowing these dubious mortgages to be put into the market. and you already decided that these securities were high risk in july, hadn't you already reached that conclusion. >> i don't believe there were new rmbs transactions in late 2007. >> you don't, the last six months. >> i -- not that i recall.

>> i actually departed s&p at the beginning of september. so i'm not familiar with the last six months of the transactions. >> well, moody's did rate rmbs... >> i apologize. i did not recall that. >> and, when, in july there was the massive downgrade, of securities, did you -- were you consulted? when that happened? >> i was aware of the downgraded, yes. >> were you consulted. >> 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. >> all right, it was not your job to be part of that decision. >> that's correct. >> did you see the impact of those downgrades, mass downgrades on the market?

were you aware of the huge impact it had on the market. >> we were observing deterioration in performance of mortgages. that is what had the impact on the market, i believe... >> the subprime market, just collapsed, right. >> and we were recognizing the deterioration with the rating downgrades, not causing the deterioration. >> well, if you would have done them a year earlier when you had information, that that 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, it wouldn't have had to have been such a mass downgrading a year later. this is the whole issue we are looking at. i'm sure you will not agree with that, but, it is 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 have the -- didn't want too, ply the resources to do it, and, some other reasons, but you didn't do it. in any event, you didn't do it, and as a result, you did it in the massive way and it had a huge effect. 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 you would have not have had this massive downgrading, which had such a huge impact in july. of 2007. and, again, i am happy to have you 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. >> we were managing the ratings system to react to actual performance data, and when it deviated from what we had seen, in the previous recession, that is when we took our actions. >> in july of '07, is david

goldste goldstein... do you know who david goldstein is? >> no, i don't. >> who danya corlito is. >> david oman? >> no, i'm sorry. >> that is okay. david bawden? >> no. >> ms. car bet look at 52-c, if you would, an e-mail dated march 20, 2007. >> do you have that? >> take to you c, and s&p employee who writes that in a meeting with kathleen corbett, she requested we put together a marketing campaign. around the events of the

subprime market. now, this is march of '07. the sooner the better. why would you want to put together a marketing campaign in march of 2007. ? >> 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 it followed along with a teleconference, investor teleconference that we put on just about this time. shortly thereafter. >> so you didn't use the term, they said you used? >> i would not -- i don't think that i would have used that term, it was clearly a communications effort. >> going back to the question of what happened, late in '07, in the last six months of '07,

after the crunch came, one of the last subprime rmbs deals that was rated was called citigroup mortgage loan trust. both s&p and moody's rated the deal in december o- 7. i don't have any exhibits for you to look at, i'll have to read it slowly. december of 2007, months after both your companied that downgraded thousands of subprime rmbss. first of all, were you aware that your agency, each of you, gave a aaa rating to four tranches of a $386 million citi bank subprime deal in december of 2007? were you aware of that? >> no, i was not. >> i was no longer with the company. >> okay, and the press release from your firm now, i'll just address this to you, and mr. mcdaniel, when you rated the

citibank deal, stated that you expected heightened losses and it accounted for that in the structure of the deal, but, 37% loss, the actual losses as of today, they exceeded any expected loss, obviously when you rated the deal. but, it is -- does it surprise you that you were still rating those subprime rmbss in december of '07? after what happened in july? does that come as a surprise to you? >> i am surprised that there was a subprime rmbs security issued in the market, to the extent 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.

>> mr... >> let me go back again, 24-b, there are a lot of interesting things there, your chief credit officer, mr. came bell wrote in october of 2007 -- kimbel wrote in october of o- 7, issues and weakness, they needed to address after the subprime market collapsed. one of the things that he wrote -- and this is under "market share -- he says, paragraph 5,

ideally competition would be primarily on the bases of ratings -- basis of ratings quality. ideally with a second component of price and third of service and unfortunately of the three competitive factors rating quality is proving the least tolerable. two lines down he says the real problem is not that the market does under weight rating quality but rather in some sectors 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 the ratings quality has surprisingly few friends. issuers want high ratings and investors don't want rating downgrades. and shortsighted bankers labor

shortsightedly to gain the rating agencies for a few extra basis points on execution. would you agree with that? >> in this section he is talking about the issue of ratings shopping. and, i agree that that existed then, and exists now. >> all right. a and... >> he's analyzing on paragraph 7, he says, the market share pressure persisted -- persists in certain areas, near the top. moody's 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? >> well, in terms of financial incentives, 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 to the extent that there is 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. >> do you agree entire committees are susceptible to

market share objectives. >> actually, no, i don't agree the committees are susceptible to that, they are not standing committees, they are ad hoc committees. >> he said methodologies and criteria are published and thus put boundaries on rating committee discretion, and he says, however there is usually plenty of latitude within those boundaries to register market influence. do you agree with that? >> i'm not sure what he means by mark influence, so i don't know if i agree or not. >> okay. >> paragraph 23. from a credit policy perspective, we want to be in a position to just say no.

to a market opportunity, would impaired... to do so from a quality perspective. we have done that in the past, and, he gives an example -- some examples and how to do it more aggressively without simply exiting whole market sectors as an unsolved problem. would you agree it is an unsolved problem? >> it's 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. >> okay. >> you have a town meeting, exhibit 98, a transcript, managing directors, you spoke at that town meeting september of

'07. on page 63 you said that what happened in '04 and '05 with respect to subordinated tranches is that our competition, fitch and s&p, went nuts. everything was investment grade. and really, 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? >> i was talking about the subordinated tranches. and 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. >> i'm sorry. >> having an impact on what. >> our business.

we didn't have as much coverage as a result. >> does that mean as much market share? >> well, both. but, really, i'm 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'm talking about the coverage necessary to provide a comparative ratings system, comparing one security to another. >> well, you were part of the competition there, ms. corbett. >> yes. >> it says s&p went nuts, everything was investment grade. >> i don't know what he is referring to. >> it really didn't matter. no one cared because the machine kept going. boy, is that true. i wish you would just say, yeah, i stand by that, and that is

what got us into trouble. >> for the sector i was talk about, i do stand by it. >> ratings kept churning out with poor models. i'll use your words: i think that the agencies really went overboard here. really went off the deep end. and, here's the reason. you had poor models, for this -- these new structures, too few resources, you were willing to commit, you had too much pressure from investment bankers, and the... it didn't end tim the massive downgrades of july of 2007 when it cratered, the market for structured finance. and this is what one of your managers, managing directors said at that town meeting. and, here's what he or she wrote: what we didn't envision was the credit would tighten after being loose, housing prices would fall after rising, and, after almost

economic events are cyclical and bubbles inevitably burst. and then he said, what happened, in '04, he asked then, too, for the leaders to be candid. and, to acknowledge what the problems were, and what had happened. and, i think there is -- you guys have a long way to go. and, in acknowledging what happened to your agencies, and, this is what he's saying and i happen to agree with him. that moody's franchise value is based on staying ahead of the pack, and i would apply this, though, to both. it just happened you had a town meeting in moody's. and i think the truth of the -- this manager applies to both. he says, moody's's franchise value is based on staying ahead of the pack on credit analysis

and instead we're in the middle of the pack and i would like more information on our errors and how we will address them in the future, one of the best comments, that i have seen. i hope you would see you that way, but, i can understand, that that may not be the case. the sec, ms. corbett, i think is conducting an investigation of s&p. they conducted an investigation, and found many problems, including staffing levels may have impacted verse aspects of the rate -- various aspects of the ratings process, is that true the sec made the finding? >> i -- i don't know, sir. >> okay. they found that s&p made changes to its rating criteria without publishing those changes? s&p, like moody's has

undocumented policies, i'm quoting, and procedures for rating rmbss and cdos, were you familiar with that finding. >> i'm not familiar with that finding, no. >> the sec found relative to moody's that you had nad cat staffing levels which impacted the rating process, that moody's analysts were using unpublished models and moody's analysts could be influenced in their ratings by the fees charged the issuers, that they were unable to find all the records surrounding a moody's rating. and, 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 the rating policies and procedures. to identify the factors that were considered in developing a particular rating. are you familiar with that? >> i am familiar with the sec examination and the overall findings, yes. >> did you agree with them?

>> the actions that the sec asked us to take, we said we'd take, so, we are complying. >> 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 a -- the role of high risk mortgages, and last friday's hearing, looked at the failures of the bank regulators, and, today we looked at the role of credit rating agencies. and it has not been a pretty picture so far and i don't think

it will 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 will look at the role of investment banks, with goldman sachs, being the case history. our investigation is -- found investment 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 dubious mortgages into complex financial instruments and got the credit rating agencies to label them aaa safe securities. sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the financial instruments 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 these -- the subcommittee's web site, either tonight or tomorrow. we thank this panel. we appreciate your being here. we -- you have given us a great deal of documents. you have cooperated with the subcommittee and we appreciate that. we'll stand adjourned. >> thank you, mr. chairman. >> thank you. [inaudible conversations]:[no a]