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Notes to Chapter 8 579

117. Ibid., 12.
118. Gary Witt, testimony before the FCIC, Hearing on Credibility of Credit Ratings, the Investment
Decisions Made Based on those Ratings, and the Financial Crisis, day 1, session 1: The Ratings Process,
June 2, 2010, transcript, pp. 168, 436.
119. Moody’s Investors Service, “Moody’s Approach to Rating Multisector CDOs,” September 15,
2000, p. 5.
120. Gary Witt, interview by FCIC, April 21, 2010.
121. Witt, written testimony for the FCIC, June 2, 2010, p. 17.
122. Gary Witt, follow-up interview by FCIC, May 13, 2010.
123. Witt, interview, April 21, 2010.
124. For example, Moody’s assumed that borrowers with different credit ratings would not default at
the same time. The agency split the securities into three subcategories based on the average FICO score
of the underlying mortgages: prime (FICO greater than 700), midprime (FICO between 700 and 625),
and subprime (FICO under 625). Creating three FICO-based subcategories rather than the traditional
two (prime and subprime) resulted in lower correlation assumptions, because mortgage-backed securi-
ties in different subcategories were assumed to be less correlated. “Moody’s Revisits Its Assumptions Re-
garding Structured Finance Default (and Asset) Correlations for CDOs,” June 27, 2005, pp. 15, 5, 7, 9, 4;
Gary Witt, interview by FCIC, May 6, 2010.
125. Hedi Katz, “U.S. Subprime RMBS in CDOs,” Fitch Special Report, April 15, 2005, p. 3; Sten
Bergman, “CDO Evaluator Applies Correlation and Monte Carlo Simulation to Determine Portfolio
Quality,” Standard & Poor’s Global Credit Portal RatingsDirect, November 13, 2001, p. 8.
126. Ingo Fender and Janet Mitchell, “Structured Finance: Complexity, Risk and the Use of Ratings,”
BIS Quarterly Review (June 2005): 68 (www.bis.org/publ/qtrpdf/r_qt0506.pdf).
127. Based on an FCIC survey of 40 CDO managers and 11 underwriters about the process of creat-
ing and marketing CDOs.
128. Moody’s Investors Service, “Structured Finance Rating Transitions: 1983–2006,” January 2007,
pp. 7, 64. Of structured finance securities originally rated triple-A between 1984 and 2006, 56% retained
their original rating 5 years later, 5% were downgraded, and 39% were withdrawn.
129. Kyle Bass, testimony to the House Financial Services Committee, Subcommittee on Capital Mar-
kets, Insurance, and Government Sponsored Enterprises, Hearing on the Role of Credit Rating Agencies in
the Structured Finance Market, 110th Cong., 1st sess., September 27, 2007, p. 11.
130. “Structured Finance Rating Transitions: 1983–2008,” Moody’s Credit Policy Special Comment,
March 2009, p. 2.
131. Moody’s Investors Service, “Announcement: Moody’s Updates Its Key Assumptions for Rating
Structured Finance CDOs,” December 11, 2008.
132. Ben Bernanke, closed-door session with FCIC, November 17, 2009.
133. Ann Rutledge, email to FCIC, November 16, 2010. Ann Rutledge is a principal in R&R Consult-
ing, a coauthor of Elements of Structured Finance (Oxford: Oxford University Press, 2010), and a former
employee of Moody’s Investor Service. She and co-principal Sylvain Raines first spoke to the FCIC on
April 12, 2010.
134. From Moody’s “Structured Finance: Special Report,” the following page 1 headlines: “2004 U.S.
CDO Review / 2005 Preview: Record Activity Levels Driven by Resecuritization CDOs and CLOs,” Feb-
ruary 1, 2005; “2005 U.S. CDO Review: Looking Ahead to 2006: Record Year Follows Record Year,” Feb-
ruary 6, 2006; “2008 U.S. CDO Outlook and 2007 Review: Issuance Down in 2007 Triggered by
Subprime Mortgages Meltdown; Lower Overall Issuance Expected in 2008,” March 3, 2008.
135. Moody’s annual gross revenues for ABS CDO ratings was $11,730,234 in 2003, $22,210,695 in
2004, $40,332,909 in 2005, $91,285,905 in 2006, and $94,666,014 in 2007. Information provided by
Moody’s, May 3, 2010. See also Moody’s Corporation 2006 10-K, p. 66 and Moody’s Corporation, 2007
10-K.
136. Witt, testimony before the FCIC, June 2, 2010, transcript, p. 46.
137. Witt, written testimony for the FCIC, June 2, 2010, p. 11; Witt, interview, April 21, 2010.
138. Eric Kolchinsky, interview by FCIC, April 27, 2010.
139. Witt, interview, April 21, 2010.
140. FCIC staff estimates based on analysis of Moody’s CDO EMS database.