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Bankers Said ‘Anything’ to Get High Rating, S&P Ex-Analyst Says

April 26 (Bloomberg) -- Just past midnight on May 3, 2005, Standard & Poor’s analyst Chui Ng e-mailed co-workers to broker a solution to demands by Goldman Sachs Group Inc. bankers that he said violated two or more of the ratings company’s internal guidelines.

Goldman Sachs was adding $200 million in debt at the “last minute” to a $1.5 billion bond pool called Adirondack Ltd., Ng wrote. That meant the New York investment bank would originate 13 percent of the pool itself, two-and-a-half times the 5 percent limit set by S&P.

Goldman Sachs also balked at Ng’s request to pay in advance for an insurance policy known as a credit default swap, which was being used to create the additional debt obligation.

The e-mails from Ng, who negotiated a compromise on Goldman Sachs’s requests, provide a rare window into the back-and-forth between the bank and a rating company assessing the risks in a financial product linked to subprime mortgages. The exchange was among 581 pages of private communications released last week by Senate investigators.

Ng, who no longer works in the rating business, said in a telephone interview April 23 that while the Senate documents contain an “incomplete record,” they show how banks pressured credit raters to lower standards as they created collateralized debt obligations, or CDOs, during the housing boom.


“The bankers would say anything to get what they needed into their deals,” Ng, 47, said. “Goldman is very good at looking at every deal; every CDO that’s ever been issued.” Ng said the perception among professionals in the ratings business was that the bank had a team that would look for “inconsistencies across different deals and use that to strong-arm Moody’s, Fitch and S&P to change their criteria.”

Asked about Ng’s comments, Goldman Sachs spokesman Michael DuVally said in an e-mail, “Goldman Sachs and others relied upon the rating agencies to supply independent analysis and ratings.” He declined to elaborate. S&P spokesman Chris Atkins declined to comment for this story.

Moody’s Corp., Fitch Inc., a unit of Paris-based Fimalac S.A., and S&P, a unit of McGraw-Hill Cos., are the three largest rating firms in global debt markets.

Senator Carl Levin, a Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations, said at a panel hearing April 23 that the raters compromised “their analysis, their independence and their reputation for reliability. And they did it for money.”


The SEC sued Goldman Sachs on April 16, alleging it had defrauded investors when selling debt tied to mortgages on another deal known as Abacus 2007-AC1. The SEC alleges that Goldman Sachs and executive director Fabrice Tourre failed to inform investors that a hedge fund led by billionaire John Paulson played a role in choosing Abacus securities that Paulson was betting would fail.

Goldman Sachs denies wrongdoing. Paulson isn’t a defendant in the lawsuit.

Goldman Sachs Chief Executive Officer Lloyd Blankfein, 55, along with Tourre and five current and former employees are set to appear before Levin’s panel Tuesday.

Ng rated several previous Abacus deals before resigning from S&P in March 2006.

Two days after his first e-mail on Adirondack to fellow members of an S&P criteria panel, Ng wrote that the firm’s modeling now accommodated Goldman’s demands. In return, the bank would put up more collateral, or find a replacement guarantor, if its own credit rating were downgraded, he wrote.

Compromise Wins

Ng’s compromise carried by a 4-3 vote while provoking sharp dissent, in part because the only one speaking up for the proposal in the released e-mails was Ng himself, Senate documents show.

“I would vote NO on this one,” wrote Lapo Guadagnuolo, a senior director of S&P’s structured finance office in London.

Kenneth Cheng, then a director in S&P’s CDO group, wrote that the compromise “opens up abuse of our criteria, devoiding it of much meaning.”

Michael Drexler, an S&P analyst in New York, also objected.

“Ignoring for a moment my stupid (and arrogant!) irritation that the correct side lost, in my mind this is a great example of how the criteria process is NOT supposed to work. Being outvoted is one thing (and a good thing, in my view) but being out-voted by mystery voters with no ‘logic trail’ to refer to is another. How can we possibly reconstruct the argument of the winning side for our future deals if it does not exist in writing for general reference?” Drexler wrote.

‘Backroom Decision’

“This is exactly the kind of backroom decision-making that leads to inconsistent criteria, confused analysts and pissed-off clients,” he added.

Reached by telephone Friday, Drexler said, “That’s exactly the kind of thing a young analyst shouldn’t put in writing. Thank God I was right.”

Ng, in the interview, defended his work on the Adirondack CDO, which S&P downgraded from AAA to AA in October 2008 and further reduced to BB+, below investment grade, in June 2009. He denied that he had led “mystery voters” to support the compromise. He said that votes on criteria often were made without identifying names to avoid pressuring ratings panelists.

“There were a lot of these one-off deals, different team leaders, different managers,” Ng said. “If they got approved, you can’t keep that a secret. After you issue it, bankers can reverse engineer the deals and everybody would ask for it.”

Among the e-mails published by the Senate committee was one from Moody’s CEO Raymond McDaniel, who ruminated about banker-rater tension in a memorandum he sent to himself shortly before midnight on Oct. 21, 2007.

“Analysts and MDs (managing directors) are continually ‘pitched’ by bankers, issuers, investors -- all with reasonable arguments -- whose views can color credit judgment, sometimes improving it, other times degrading it (we ‘drink the kool-aid’),” McDaniel wrote, incorporating remarks that he’d heard from some of his employees in recent weeks. “Coupled with strong internal emphasis on market share & margin focus, this does constitute a ‘risk’ to ratings quality.”

To contact the reporter on this story: Elliot Blair Smith in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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