William Harrington, a former senior vice president in the structured finance group at Moody's, noticed the problem back in 2005, and described it in his devastating takedown offered to the S.E.C. [1] In one section, "Making It All Up: Methodology for Structured Investment Vehicles ("SIVs')," he recalled a computer lab training session attended by himself and some colleagues 2005, when where they were introduced to a Moody's model for estimating the haircuts on bond prices sold under an SIV liquidation scenario. " The training session left the contributor confused," wrote Harrington, who referred to himself as the contributor. So far as he could tell, the methodology simply didn't add up. So Harrington asked a colleague if he had missed something. "The colleague replied that nothing about SIVs added up. In rating SIVs, analysts ran the SIV tool and presented the output to Henry Tabe, their manager. Mr. Tabe then disregarded the output and made up haircuts that were palatable to SIV issuers [i.e. the Wall Street banks]." At that point, Harrington decided that he wanted nothing more to do with SIVs.
Little did Harrington know that two years later, SIVs would make history, as the first ever triple-A-rated bonds to default. They were a trickle before the flood.
[1] Harrington's 2011 submission
was in response to the S.E.C.'s solicitation of comments on proposed
regulations for the rating agencies.
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