A new report from Wachovia Securities cites market opinion challenging the integrity of Standard & Poor's. It reports there is widespread belief in the markets that, for business reasons, S&P has not followed the lead of its fellow rating agencies in changing its methodology in rating collateralized debt obligations. "When one looks at their market share, that's a natural question to ask," Natasha Chen, v.p. in the CDO research group at Wachovia in New York, told BW.
Wachovia notes that Moody's Investors Service and Fitch Ratings have made changes to their correlation assumptions, particularly for rating deals referenced to a synthetic pool of assets. These assumptions play a critical role in determining how much credit enhancement is needed to achieve top rating marks. "The topic of correlation and modeling correlation is one of the hottest areas in credit today," Chen said, explaining why Wachovia is addressing the issue now. "It's a difficult problem."
The report says many market participants believe S&P has not made changes to its correlation assumptions because its current criteria help it win business. "Given S&P's generous inter-industry correlation assumption of 0%, it is not surprising that S&P has the dominant share of the publicly rated part of this market," the report says.
Chen stressed the report is not meant as an attack on S&P but to discuss all three rating agencies' assumptions. "We try to point out the weaknesses in the three." She said the report was put out without any input from the group's origination side and declined to predict how it might affect Wachovia's relationship with the rating agencies.S&P spokesman Adam Tempkin said it is evaluating studies on asset correlation and will update the marketplace on its findings in the near future. "We were the first to highlight the importance of asset correlation in our model and have done extensive research on a variety of assumptions used in our model since that time. This work is ongoing," he said in a statement. He added: "All of our judgments are based on our best assessment of risk which is born out by our default and transition studies."
Moody's and Fitch officials did not return calls by press time.