Telephone messages left at numbers in New York state for individuals named Patrice Jordan and David Tesher weren’t returned.
Big Loophole
The CDO group had earlier tweaked its models to win business, the Justice Department said. At a 2006 meeting, it decided to take the step of beginning to assume no correlation between the performance of RMBS and CDOs filled with asset- backed securities such as RMBS, according to the complaint.
Correlation, or how likely it is for the debts to go bad at the same time, was a key metric in determining the odds of default for mortgage-tied CDOs, which were often filled with both types of assets.
“Tesher and other business personnel were in favor of this decision, which was made without the benefit of any data and would lead to S&P’s rating models arriving at lower estimates of credit risks for CDOs collateralized by such assets,” the Justice Department said.
The next year, a CDO analyst told a former coworker that the result was “a loophole in S&P’s rating model big enough to drive a Mack truck through,” the Justice Department said.
No Secret
Also in 2005 and 2006, after an internal report discussed how Bear Stearns Cos. pointed out “the potential business opportunities we would miss” by introducing an update to its CDO model the bank had tested, S&P delayed the new version, known as E3. It then allowed some issuers to use a weakened version during a three-month transition period, without telling investors, and allowed other types of CDOs to use the old version for months more, according to the complaint.
“We have toned down and slowed down our roll out of E3 to the market, pending further measures to deal with such negative results,” the report sent internally by Jordan had said, referring its model known as CDO Evaluator 3.0. The easier version was referred to as E3 Low.
Bear Stearns collapsed in 2008 and was bought by JPMorgan Chase & Co. with assistance from the Fed. The costs of government steps to revive the economy added to the national debt, leading S&P to strip the U.S. of its top credit grade in August 2011.