99 Church Street New York, New York 10007 Raymond W. McDaniel President Tel: 212.553.4765 Fax: 212.553.3740 Email: raymond.mcdaniel@moodys.com
March 30, 2007 By Electronic Mail Nancy M. Morris Secretary Securities and Exchange Commission 100 F Street, NE Washington, DC 20549-1090 Re: Proposed Rules Regarding Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations (Release No. 34-55231; File No. S7-04-07)
Dear Ms. Morris: I would like to correct an apparent misconception that some market participants have expressed about the rating practices of Moody's Investors Service (Moody's) with regard to collateralized debt obligations (CDOs). Contrary to assertions made by some market participants,1 when rating securities issued by a CDO, Moody's does not require that the underlying collateral carry Moody's credit ratings.
1
See, for example, in a letter dated March 12, 2007, from Charles Brown of FitchRatings to Nancy Morris of the SEC, where Charles Brown asserts, "Moody's Investor Services, [sic] …, as a condition of rating securities or money market instruments issued by an asset pool (such as a money market mutual fund or a pooled investment vehicle), or as part of any asset-backed or mortgage-backed securities transaction (such as a collateralized debt obligation or structured investment vehicle) (collectively, a "Portfolio Product"), insist[s] on rating most, if not all, of the assets underlying the portfolio…." (Emphasis added).
Moody's commonly rates CDOs in which some – and, in some cases, all – of the underlying collateral assets do not carry a published credit rating from Moody's.2 Of course, in such situations, Moody's still forms its own opinions about collateral securities included in CDOs, and does not automatically accept third party opinions, whether from transaction sponsors, other rating agencies or even other Moody's affiliates as if they were our own. A sponsor of a securitization can choose from among three methods by which Moody's can form an opinion about the risk profile of non-Moody's-rated collateral debt obligations: 1. Moody's can undertake a fundamental review or a quantitative analysis3 of the collateral to arrive at credit estimates; 2. Moody's can review the sponsor's internal credit scoring system and "map" Moody's ratings to the sponsor's credit scores;4 and 3. Moody's can incorporate the opinions of other rating agencies about the collateral, including adjusting ("notching") where appropriate, to reflect where Moody's credit opinions diverge from those of other agencies. Moody's provides the third option at the request of some collateral managers who prefer the speed of execution and certainty of results it provides in comparison to credit estimates. This last option, however, is available only when Moody's has sufficient data to derive a mapping between another agency's ratings and the ratings Moody's has derived internally or determines it would have assigned for a similar type of collateral based on existing ratings comparison analysis. For a number of important asset classes, Moody's has sufficient data to devise appropriate mapping and notching rules for Fitch's and S&P's ratings.5 These rules and the data analysis that supports them are publicly available.6 As documented in these

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