The long-awaited release of National Economic Research Associates' notching study ignited some controversy last week, with each rating agency anxious to put its own spin on the results.

"Everybody pointed to what they thought were the best things they could point to for themselves, and they all declared victory," said Brian Clarkson, a senior managing director at Moody's Investors Service.

NERA's study - which Moody's commissioned in December 2001 - ended up as a 264-page analysis of variances in structured finance ratings across agencies for at least a five-year period, ending in 2001, as previously reported (see ASR 10/27/03).

Its findings, while detailed, proved to be "disappointingly inconclusive," according to Mark Adelson, head of structured finance research at Nomura Securities.

Although intended to help settle the notching debate, the study appears to have instead spurred more debate. Literally within minutes after its release Thursday morning, all three rating agencies rushed to issue commentaries and highlight what they considered the most favorable statistics, drawing somewhat conflicting conclusions.

Nomura's Adelson, himself a former managing director at Moody's before leaving in 2001, weighed in with a report of his own, adding the findings would have little effect on the market. He said proponents of "notching" might view the study favorably because NERA could not reject the hypothesis that ratings from different agencies perform differently. However, he added, NERA could not reject the converse either.

"The truth of the matter is, the study is very unhelpful," Adelson said. "The people who needed firm conclusions don't have them."

He said he believes NERA tried to achieve meaningful results, but the data supplied by the agencies themselves did not permit it. And he said the implications of that are significant, going far beyond a dispute among rating agencies, and regulators should take note.

"I'd like to hope - but I'm not holding my breath - that it will prompt our policymakers to reconsider the practice of using ratings for regulatory purposes. I don't think it's hurt us yet, but I think it can," he said.

In his take on the results, Moody's Clarkson said the NERA study confirms that there are real and substantive differences among agencies in the ratings themselves, as well in the meanings of the ratings, methodologies and monitoring practices. Clarkson said the differences are especially pronounced when ratings involve speculative grade issues.

Moody's ratings of investment-grade issues differ from those of competing agencies Fitch Ratings and Standard & Poor's more than 30% of the time, and more than 60% of the time for speculative grade issues.

Fitch took the position that while there are some differences in credit opinions among the three rating agencies, the differences are small.

"We're not disputing that there is a difference. But clearly, the trend is toward convergence," Fitch spokesman Jim Jockle said. "We think the number that's most germane is for year-end 2001 - which is the last year of the study. On average, Fitch rated three-tenths of a notch higher than Moody's and one-tenth higher than S&P (for investment grade issues)."

For its part, S&P said the report showed it has the highest market share and is more likely to recognize changes in credit quality and initiate rating changes. S&P also said the study shows it changes ratings less often - which, it says, indicates that its ratings are more consistent and stable.

Rating agency officials engaged in some debate about each others' claims. Clarkson, describing S&P's subsequent press release as "amusing," took issue with S&P's claim of highest market share, for example. Because S&P's "confidential" (or unpublished) ratings were included, the numbers do not represent an accurate comparison of ratings from the agencies, Clarkson said.

But S&P spokesman Adam Tempkin defended the statistic. "We believe that in terms of market share, the comparison that NERA presents is apples-to-apples," Tempkin said.

Despite disagreements over the various interpretations of the results, most market players received the study warmly. Even Adelson, while disappointed, said, "The market is better off for having a study like this."

Adelson added that although NERA's study is generally inconclusive, it does offer several specific findings that appear to support the case for notching. He also said the study indicates that assigned ratings conform with each other less often than might be expected.

The notching controversy flared up in June 2001 (see ASR 6/18/01) as rating agencies were increasingly being asked to rate CDOs backed by underlying collateral pools it had not rated. In the

ensuing months, considerable resources and numerous reports emerged focusing on notching policies, prompting Moody's to commission NERA to conduct this study.

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