CDS Seen as Having Escalated MBS Rating Challenges

Increased use of credit default swaps and other more complex, synthetic financial instruments "really changed the nature of banking" in the mortgage-backed securities market and made it tougher to rate deals, a former managing director for a rating agency's derivatives unit told the Financial Crisis Inquiry Commission. Noting how at one point RMBS were increasingly packaged into collateralized debt obligations and structured investment vehicles, and pieces of CDOs were increasingly repackaged and sold into other CDOs, former Moody's Investors Service team managing director Eric Kolchinsky said analysts "did not anticipate that sort of investor" when originally rating deals. He told the commission during a hearing in New York Wednesday morning it was his impression that no analysts were consciously "wrong" about ratings and worked very hard on them, but at a certain point he felt he had no power or sufficient resources to make sure they were right. He said other challenges for analysts included pressure to rate deals quickly from bankers who wanted to minimize their warehouse risk.