Lars Norell, director at Merrill Lynch, expressed frustration with ratings agencies' CDO procedures, saying that they are slow to adapt to structural innovations and require excessive historical data. "Ratings agencies shift the burden of proof to CDO managers and issuers," he said. For example, if they are approached to rate a trust preferred deal, they will ask structurers to show 30-years of historical data, which does not exist.
Correlation assumptions also came under fire with Norell saying diversification requirements made by ratings agencies prevent dealers bringing some structures to market. Mark Froeba, v.p. and senior credit officer at Moody's Investors Service, speaking on the same panel, interjected that Moody's does not place any restrictions on the amount of correlation a portfolios must have to be rated. Norell quipped that even so, highly correlated structures would be required to have 50% of equity in the deal, alluding to the idea that CDOs with low diversity scores require larger subordination cushions.
