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FCIC Interview of Gus Harris – May 13, 2010

United States of America
Financial Crisis Inquiry Commission

INTERVIEW OF
GUS HARRIS

Thursday, May 13, 2010

*** Confidential ***

FCIC Interview of Gus Harris – May 13, 2010
Financial Crisis Inquiry Commission
Thursday, May 13, 2010

MR. BONDI:

-- interview, it’s in accordance

with our policy.
MR. HARRIS:

Yes.

MR. BONDI:

Okay.

FCIC MAN:

It’s on.

MR. BONDI:

Great.

First, you can turn on the

recorder.

Good afternoon, Mr. Harris.
Bondi.

My name is Brad

I’m with the Financial Crisis Inquiry Commission

in Washington.
The Financial Crisis Inquiry Commission in
Washington was established by Congress in 2009 to
investigate the causes of the financial crisis, and to
do a report due at the end of this year, December 15th.
We’re also, as part of our mandate,
investigating the role of credit ratings and
credit-rating agencies in the financial crisis.
Do you consent to being interviewed by and
being recorded today?
MR. HARRIS:

I do.

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

Okay.

Would the persons in the room please announce
themselves and say their last name again?
It’s Brad Bondi, B-O-N-D-I.
MR. BUBB:

Ryan Bubb, B-U-B-B.

MS. NELLES:
Cromwell.

Sharon Nelles from Sullivan and

And with me is Max Valdez, also of Sullivan

and Cromwell.
MR. ROSS:

Steven Ross from Aiken Gump; and

I’m accompanied by Megan Griff, also from Aiken Gump.
MR. HARRIS:
MR. BONDI:

And Gus Harris from Moody’s.
Mr. Harris, as I mentioned, we’re

with the Financial Crisis Inquiry Commission.
I’m obligated to tell you, because we are
government employees doing an investigation, a statute
known as 18 USC 1001 applies.
Mr. Ross here or Ms. Nelles can explain to you
what it says.
In layman’s terms, it just says that -- I
shouldn’t say “just says” -- it says that it makes it a
crime if anyone knowingly or willfully provides false or
misleading information to a government employee during

FCIC Interview of Gus Harris – May 13, 2010
the course of his duties.

So that applies.

I don’t have reason to believe, Mr. Harris,
that you’re not going to be truthful with us today; but
I’m just obligated to tell you and everyone else that we
interview.
If you could start off and tell us about your
background at Moody’s.

When did you start and what

positions have you held?
MR. HARRIS:

I started at Moody’s in September

of -- I believe September of 1995.

And at that point, I

was a vice president in the Managed Funds Team.
I remained on the Managed Funds Team until, I
believe, 2000.

I don’t know exactly the time frame.

I also, in the late nineties, I did a little
work, part-time work in the credit derivatives area.
was rating some of the early vintage cash flows.

That

was roughly ‘97, ‘98.
In ‘99, we had two jobs, the Managed Funds
Team and some work in derivatives.
When I was promoted to team managing
director -- again, I don’t know if it was ‘99 or 2000 -at that point my Managed Funds responsibilities were

FCIC Interview of Gus Harris – May 13, 2010
relinquished.

And I believe at that point my role in

the derivatives team was for cash flow -- primarily
cash-flow CDOs.
I maintained that role until –- of team
managing director until January of 2005, at which point
I was promoted to group managing director, with a
responsibility for the New York credit derivatives
business, in addition to the -- back to the global
Managed Funds.

So I went back to the Managed Funds

Team, managing that team.
And my background, by the way, is in mutual
funds.

I spent many years of training in school in

[unintelligible] mutual funds.
Also at around that time, I was asked to
create a new team, which eventually became the New
Products Group, which is what I manage today, which I
believe by late ‘05 I developed a methodology for
analyzing hedge-fund operation quality and other types
of hedge-fund-related risks.
MR. BONDI:

And was Dr. Gary Witt assigned to

head the New Products Group when it was created?
MR. HARRIS:

He was assigned to it.

I don’t

FCIC Interview of Gus Harris – May 13, 2010
recall if he was assigned to it when it was created, but
he was -- he was a team managing director in creating
the operations quality ratings, yes.
MR. BONDI:
MR. HARRIS:

Okay.
Also, sometime in ‘05 -- the

other role that I maintained was to be responsible for
the processing of data and the creation of analytic
tools.

Now, I’m going to take a step back.
So at around 2000, when I was promoted to team

managing director, what I wanted to -- what I thought we
should do was get all the data that was being sent to us
and put it in a database so that we could be more
efficient in the way we process our data, study the
data, and monitor the deals.
So early 2000’s I started also creating some
databases and some products, research products off of
the data.
By 2005, when we set up a New Products Group,
I was given the clear mandate to spearhead all of those
initiatives with regard to the automation, the data,
creation of analytic tools.
So sometime in ‘05, we also -- we had

FCIC Interview of Gus Harris – May 13, 2010
discussions with a company called Wall Street Analytics
based on the West Coast.

They had been in business

since the late eighties, creating tools, analytic tools
for the structured finance base.
Those discussions went on for a year, maybe
even more than a year.

But eventually, we acquired the

company by late ‘06.
So the New Products Group evolved from a hedge
fund, operations quality rating, and the creation and
maintenance of databases and analytic tools, our
research products and for clients.

And then through the

acquisition of Wall Street Analytics, we added -- we
significantly improved our capabilities in the area of
structured-finance analytics.

So that was the

foundation of the New Products Group.
Also, the closing of the Wall Street Analytics
acquisition in late ‘06, at that point my role in the
derivatives team was redefined and limited solely back
to the business that I initially grew up in, which is
the cash-flow CLO business.
MR. BONDI:
MR. HARRIS:

I’m sorry, when did -The cash flow of late ‘06.

FCIC Interview of Gus Harris – May 13, 2010
December of ‘06 it was formalized, and it was announced
sometime in October or November.
The plan was as soon as the Wall Street
Analytics acquisition closed, the plan would be in
effect.
And the deal -- the Wall Street Analytics
acquisition should have closed sooner than late-year.
But it closed late-year of ‘06.
So effective with the acquisition of
Wall Street Analytics, my responsibilities were then to
maintain the Global Managed Funds -- I believe I
maintained the Global Managed Funds.
Now, to take a much larger New Products Group,
along with the operations quality rating -- and I
believe at that time we were also creating vendor
information risk ratings, and now a much larger
structured finance platform.

And I spent a lot of time

trying to build the Wall Street Analytics.
FCIC MAN:
second?

Would you mind holding on for a

I just want to make sure the tape recorder is

working correctly.

Is that okay?

MR. BONDI:

Sure.

FCIC Interview of Gus Harris – May 13, 2010
FCIC MAN:

Hold on a second.

(The recorder was stopped and restarted.)
MR. BONDI:

-- a series of technical

difficulties.
FCIC MAN:

Okay, everything’s cool.

It’s

working.
MR. BONDI:
FCIC MAN:

You got it figured?
Yes, it ‘s fine.

I was sort of

checking, to make sure it was recording.
MR. BONDI:

Great.

Okay, sorry.
MR. HARRIS:

Please.
And my role on the derivatives

team was the U.S. CLO business.
I believe by the middle of the year -MR. BONDI:
MR. HARRIS:

The middle of 2007?
Yes, 2007.

So in the first half

of the year we had the Managed Funds group, much larger
than the New Products Group, and the U.S. CLO team.
MR. BONDI:
MR. HARRIS:

Uh-huh.
You may want to get into

[unintelligible].
I think -- I think it was August -- it will be

FCIC Interview of Gus Harris – May 13, 2010
August, maybe sometime in July my responsibilities for
the U.S. CLO team were also relieved.
MR. BONDI:
MR. HARRIS:

Okay.
And I focused primarily on the

New Products Managed Funds.

But also happening in New

Products at that time, early in the year, we were having
discussions with various companies to make investments
to expand our structured platform into valuations for
other instruments.
So shortly after –- so we had lined up
additional acquisitions for later on in the year, that
would be closing late ‘08 -- I’m sorry, late ‘07 and
early ‘08, I believe.
We acquired the Merchants Evaluations business
and we acquired Best Quotes [phonetic] which provides
pricing for structured finance -- structured
credit-default swaps.
And I believe it was in the middle of ‘08 when
the Managed Funds Team was –- well, I was the lead also
of managing the Global Managed Funds Team.
was the middle of ‘08.

I think it

And at that point, it was solely

the –- sort of this New Products group which had a

FCIC Interview of Gus Harris – May 13, 2010
structured finance platform, we still had the -- we had
vendor commission ratings, and we had entered the
valuation space through the acquisitions, the Mergent
Evaluations business and best [unintelligible].
MR. BONDI:

Uh-huh.

And does that take us to

present?
MR. HARRIS:

We ended up exiting -- we ended

up exiting the –- we ended up exiting the -- three of
those four initiatives.

We exited the vendor

information risk business, we exited the valuations
business.
Mergent.

We sold off Credit Quotes.

We sold off

The Wall Street Analytics platform continues

to report to me.
MR. BONDI:

And what is your current title or

position?
MR. HARRIS:

I’m an executive director in

Moody’s Analytics.
MR. BONDI:

I just want to break out some of

the things you said about CDOs that had RMBS as the
underlying collateral.
That was under your bailiwick from 1999, 2000,
through when?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

No, it was under -- in ‘99 --

when I was promoted in ‘99 and 2000, I was responsible
for the cash-flow CLO business.
MR. BONDI:
MR. HARRIS:
MR. BONDI:

CLO?
That’s what I focused on.
Okay.

When did you start working

with CDOs that had RMBS as the underlying collateral?
MR. HARRIS:

When I got promoted to group

managing director in 2005.
MR. BONDI:

January 2005?

Okay.

And how long then were you working with CDOs
with RMBS as the underlying collateral?
MR. HARRIS:

Until the end of 2006.

From 2/4

of 2006.
MR. BONDI:

Got it.

So, roughly, 2000 -- January 2005 through
December 2006, ABS CDOs with RMBS collateral was under
your bailiwick?
MR. HARRIS:

I was the group managing director

for the U.S. CDO business, which included CDOs backed by
RMBS.
MR. BONDI:

From January ’05 to December 2006,

FCIC Interview of Gus Harris – May 13, 2010
who was reporting to you?
MR. HARRIS:

I don’t know the exact dates the

people reported to, but over that time period, those two
years as a group managing director, I had reporting to
me, at one point or another:
Yoshizawa, Bill May.

Gary Witt, Yvonne Fu, Yuri

I believe that -- I believe that’s

everyone.
MR. BONDI:
directors?

And those were the managing

They were managing directors?
MR. HARRIS:

I’m sorry, and Roger Stein for

the -- I think Roger managed the Managed Funds group,
just for the Managed Funds Team.
MR. BONDI:

Okay, and of these, Mr. Witt was

involved, at least for some of that time period in CDOs
with RMBS collateral, right?
MR. HARRIS:

That is my recollection, yes.

MR. BONDI:

Yuri Yoshizawa was involved in

CDOs with RMBS collateral as well?
MR. HARRIS:

I think Yuri was probably

primarily for synthetics.
MR. BONDI:
MR. HARRIS:

Synthetic?
CDOs which may have included --

FCIC Interview of Gus Harris – May 13, 2010
which may have included RMBS instruments as a reference.
MR. BONDI:

A reference?

MR. HARRIS:
MR. BONDI:

It may have.
Okay.

And what was Yvonne Fu

responsible for?
MR. HARRIS:

I believe Yvonne came later on in

the year, in 2005, back from maternity leave.
MR. BONDI:

Uh-huh.

MR. HARRIS:

And she was responsible for U.S.

RMBS deals, credit-derivative product companies,
catastrophe bonds.
So Gary and Yvonne are Ph.D.s, so they tended
to give more quantitatively intense structures to them.
So a catastrophe bond, for example, would fall
under Yvonne’s area.
MR. BONDI:

It wasn’t just RMBS deals.
Okay, and Bill May was primarily

doing CLOs and CDOs?
MR. HARRIS:

Yes.

CLOs, primarily, is my

recollection, yes.
MR. BONDI:

Which are more sophisticated or

difficult analytically:

CDOs with RMBS collateral or

synthetic CDOs that reference RMBS collateral?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

So it’s hard -- I don’t know.

expertise is not in synthetics -MR. BONDI:
MR. HARRIS:

Uh-huh.
-- and my expertise is not in

RMBS, so it’s hard for me to try to comment on these two
structures that I’m not familiar with, or I’m not -- I
have not rated them, so I do not know which one would be
more difficult analytically.
MR. BONDI:

No impression from talking with

the managing directors under you?
MR. HARRIS:
corporate deals.

I could try to make a parallel to

Like a corporate CDO with a corporate

synthetic, it’s -- because you have similar assets but
they’re two different structures.
Would you like me to try to make that analogy
or no, on the corporate side?
MR. BONDI:

Please, go ahead, if you think

that helps.
Well, I mean, my question, though, was did you
have any sense of which was more complicated to rate:
The synthetic CDOs or the cash CDOs that Mr. Witt and
his team were rating?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I never rated one of these deals.

It’s hard for me to comment on that.
MR. BONDI:

And did you ever serve on any

ratings committees for synthetic CDOs or cash CDOs?
MR. HARRIS:

It’s possible.

I don’t recollect

sitting in actual committees for synthetic or RMBS
deals, but I most likely did sit on committees.
MR. BONDI:

And when you said “RMBS deals,”

I’m talking about CDOs with RMBS collateral.
MR. HARRIS:
MR. BONDI:

Yes.
And the same answer is, you don’t

recall sitting on any committees?
MR. HARRIS:
committees, no.

On specific ones, on specific

But I’m blanking on standing

committees.
MR. BONDI:

Did you ever [unintelligible] a

man named Eric?
MR. HARRIS:

Kolchinsky.

Yes, Eric -- Eric,

he’s -- he worked for me in the New Products Group
recently, in Wall Street Analytics, in fact, from the
Cue Ball [phonetic].

He worked for me from, I think,

October, November of ‘07 until he left in, I think,

FCIC Interview of Gus Harris – May 13, 2010
September of ‘09.
Prior to that, he helped me -- he worked for
me, maybe 2003, 2004.
Eric had worked for Moody’s in the early
two thousands, and then he left, and then he came back.
Before he left the first time, he helped me
with the new products that we were building.

And he

helped me get those reports out, he helped manage the
team, he helped organize our data better and make the
products more helpful to the marketplace.

Then he left.

I believe he went to Lehman Brothers.
He came back, I don’t know, maybe sometime in
2005.

I don’t know exactly when.

directly to me.

He did not report

He reported to one of the managing

directors, which I think would have been Gary or Yvonne.
But he didn’t report directly to me.
But he worked for me starting in ‘07, when he
moved over from the rating agency to Moody’s Analytics.
MR. BONDI:

Were you involved in any

committees that were responsible for updating or
changing the models used to rate CDOs with RMBS
collateral?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I do not recall being involved in

those committees.
MR. BONDI:

Were you involved in any

committees at all that were involved in changing or
updating assumptions used for any of the models that
were used to rate CDOs with RMBS collateral?
MR. HARRIS:
MR. BONDI:

Yes, I recall.
What committees do you recall

participating in?
MR. HARRIS:
middle of ‘05.

I think this was maybe in the

I don’t know the exact time frame.

You know, what we tried to do was to reconcile
the methodology used in CDO-ROM.
CDO-ROM was the model that we viewed as being
the most precise.

To my recollection, it’s a simulation

model that was developed by a [unintelligible] Ph.D.s.
And that is the model that what we wanted to do, was
reconcile the cash-flow models to CDO -- to CDO-ROM.
MR. BONDI:

So who else was on this committee

that was responsible for reconciling the cash-flow CDOs
to CDO-ROM?
MR. HARRIS:

I think –- I don’t recall all the

FCIC Interview of Gus Harris – May 13, 2010
people, but I believe at that meeting would have been
most of the managing directors, including managing
directors in Europe and Noel Kirnon, who is the person I
reported to.
Noel headed up the Global Derivatives Group.
There would have been Noel, myself, Paul Mazataud,
Gareth Levington, most likely Gary -MR. BONDI:

Gary Witt?

MR. HARRIS:

Gary Witt.

And at that point, I

think Gary was also the managing director, as was Bill.
But I don’t recall specifically, you know, if they were
there.
MR. BONDI:

Who chaired that committee?

MR. HARRIS:

I do not know.

I don’t recall.

My guess would have been Noel, but I cannot -I don’t know for sure.
MR. BONDI:

And was there ultimately a

determination reached by this committee?
MR. HARRIS:
multiple analytics.

My recollection was that we ran

The European team ran them, the New

York team ran them, and we tried to assess where they
converged.

And at the end, my recollection was that the

FCIC Interview of Gus Harris – May 13, 2010
numbers didn’t -- we weren’t able to get the numbers to
reconcile.
MR. BONDI:

And what does that mean, you were

unable to get the numbers to reconcile?
MR. HARRIS:

The results were that the two

models -- my recollection is that the results from the
two models were fairly similar.
MR. BONDI:

And just to be precise, the two

models you’re talking about is CDO-ROM and what other
model?

The BET model?
MR. HARRIS:

I think it was -- I don’t know

exactly what the –- from the correlated binomial.
That’s what I would –- what I think was the model at
that time.
MR. BONDI:

And how were you able to get the

correlated binomial and CDO-ROM model to reconcile?
MR. HARRIS:

My recollection is that we ran

many deals from the two models, and the results were
[unintelligible].
MR. BONDI:

Were these past deals that had

been rated by Moody’s?
MR. HARRIS:

I believe so, yes.

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

Who was responsible for running

the deals through the two models?
MR. HARRIS:

I believe -- I forget the

analyst’s name at the time.

But we had an analyst --

analyst [unintelligible] the work.
MR. BONDI:

And from your work on this

committee, was there ultimately a document generated and
made public?
MR. HARRIS:

There was, I believe, September

of ‘05 we published a report.
MR. BONDI:

Do you recall what that was

called?
MR. HARRIS:
MR. BONDI:

I do not recall.
And this report outlined or

described the assumptions that would be used?
MR. HARRIS:
MR. BONDI:
which model?

I believe so.
And these were assumptions for

The CDO-ROM model?

MR. HARRIS:

I don’t know.

I think it would

have been for the model that was used to rate the
cash-flow deals.

But making it -- but also

[unintelligible] the fact that it is consistent with

FCIC Interview of Gus Harris – May 13, 2010
CDO-ROM.

So it would have been the cash-flow

methodology.
MR. BONDI:

And tell me about some of these

assumptions that were developed.
What were your assumptions?

What were the

assumptions that were being discussed at this committee?
MR. HARRIS:

I’m -- I’m not sure exactly what

the assumptions were.
My sense would have been that the default
rates for the company rates, the correlations and the
default timing would have been considered.
MR. BONDI:

And for each of those various

assumptions, did a particular committee member have the
role of leading, looking into those assumptions?
MR. HARRIS:
MR. BONDI:

I did not.
Is there a division of labor?

MR. HARRIS:

I do not believe so.

MR. BONDI:

Do you want to ask –-

I do not

recall.

MR. BUBB:

Yes, that would be great.

I want to step back and talk about what the
goal of the committee was.

FCIC Interview of Gus Harris – May 13, 2010
So at that point in time, you had the BET
model and the CBM model that were used to rate different
kinds of CDOs, and there were rules that determined
which deals were rated with the BET and the CBM.

You

also, on the synthetic side, had initiated use of the
CDO-ROM model and software to rate those deals.
And if I understood correctly, the goal of the
committee was to reconcile these two alternative
approaches, meaning, the CBM -- the old CBM approach to
this new CDO-ROM approach.
What exactly -– how do I say this?
So why was it important that they reconcile?
Let’s start with that.
MR. HARRIS:

So not being a -- I’m not a Ph.D.

And the -- my understanding is that the correct -- the
analytically correct approach for analyzing credit risk
would be primarily through a simulation.
CDO-ROM provided that simulation -- the
simulation model.
A BET is an estimate -- we tried to estimate
the result of a simulation through a binomial expansion
methodology.

FCIC Interview of Gus Harris – May 13, 2010
So as we constantly try to update our
methodologies, it’s an ongoing thing, it’s something
that we always did.

One of the objectives was to try

to understand how the estimation process, the binomial,
tied out to something that we viewed as being more
precise, which was a simulation model.
And my recollection is, we’ve done that, and
we were doing it, for many asset classes, not just for
RMBS deals.
MR. BUBB:

[Unintelligible] a simulation

approach, a better approach, why was simulation viewed
as being a superior approach?
MR. HARRIS:

So, my understanding of the

binomial is that it’s a -- it’s sort of a smoother -the binomial gives you a distribution that is not as
precise as a simulation.
portfolio.

It smoothes the result of the

And as your binomial, as your number of

diversity bonds declines, the distribution may not do
that good of a job to try to approximate what a
simulation would provide.
MR. BONDI:

And who -- what precipitated,

though, the need to reconcile these two models?

I mean,

FCIC Interview of Gus Harris – May 13, 2010
what prompted the need for the committee to be formed in
the first place?
MR. HARRIS:

I believe it is around that time

that CDO-ROM was first introduced.
So my recollection is that we tried for a
while to build a simulation model.

And CDO-ROM was

built, and here was an opportunity to try to
[unintelligible] to something that -- to a model that
provided greater -- what we called provided greater
precision.
MR. BUBB:

So was the goal essentially then to

adopt, to incorporate the CDO-ROM simulation into the
cash-flow CDOs?
MR. HARRIS:

At that point -- at that point,

you couldn’t do it, unfortunately.

The -- you could run

the CDO-ROM in the synthetic environment because there’s
no cash flows.
The technology to bring simulation into a
cash-flow model, pretty significant.
And that’s one thing when we [unintelligible]
analytics, that’s one thing that we’ve done since then,
that’s one thing that we tried to incorporate into our

FCIC Interview of Gus Harris – May 13, 2010
tools.
MR. BUBB:

So, I’m sorry, was the goal of this

committee to figure out how to incorporate the CDO-ROM
simulation into the cash-flow methodology?
MR. HARRIS:
MR. BUBB:

It was not.

So if it had -- my understanding of

the report that the committee published, announced a new
approach to rate cash-flow CDOs.

And that approach

involves first run the CDO-ROM simulation to produce a
simulated loss distribution, and then to use that
simulated loss distribution to choose the parameters of
the correlated binomial model.
So, indeed, the outcome of the committee was
to devise a methodology that incorporated the CDO-ROM
simulation into rating cash-flow CDOs is my
understanding; correct?
MR. HARRIS:
methodology.

It’s incorporated to the

But the way I interpreted the question is

to actually put the simulation into the methodology.
Yes, you’re -– it’s to incorporate the result of CDO-ROM
into the methodology, yes.
MR. BUBB:

Understood.

So you thought I meant

FCIC Interview of Gus Harris – May 13, 2010
you would just do CDO-ROM, done, that’s it?
MR. HARRIS:

No, I think you take CDO-ROM and

fold it into the cash-flow model.
simulate in the cash-flow model.
MR. BUBB:

So now you could
That’s a huge --

I see.

MR. HARRIS:

-- logical -- we’ve been

investing to build that functionality.
MR. BUBB:

So then the goal –- the goal then

was to figure out how to use the CDO-ROM simulation and
feed the results into your CBM methodology for rating
cash CDOs; is that –- am I saying that correctly?

that -MR. HARRIS:

I think the result -- the

objective was to -– again, my understanding of the
objective was to try to look -- to look at the CD-ROMs
and try to create a correlated binomial distribution
that approximated the CDO-ROM results.
MR. BUBB:

So in other words, the goal of the

committee didn’t change over time?

It was formed to do

one thing and it also did what it was formed to do?
MR. HARRIS:
MR. BUBB:

That is my recollection.

And so you had already been using

FCIC Interview of Gus Harris – May 13, 2010
the CDO-ROM model for synthetic CDOs at this time.
It had already been launched; is that right?
MR. HARRIS:

I don’t know the exact timing,

but I think CDO-ROM was built around that.
if it was built in ‘04 or ‘05.

I don’t know

I don’t know exactly

when it was built, but it was around that time.

That’s

my recollection.
MR. BUBB:

And you described the -- at one

point, you described the goal -- one of the goals of the
committee was to reconcile the old approach with the new
approach you all were devising.
Why was it important to reconcile?

Just help

us understand the thought process here.
I can imagine, just to give you an alternative
thought approach, you could imagine not caring what the
old way did, and say, “Look, we want to do this better,
and we’re now going to devise a model and assumptions
that give the best answers, and it doesn’t matter
whether it reconciles.

We just want the right answers.”

Can you help us understand what you mean
by ”reconcile,” why that’s important?
MR. HARRIS:

Actually, the purpose of the work

FCIC Interview of Gus Harris – May 13, 2010
was to incorporate the CDO-ROM results into the
correlated binomial methodology.

That was the

objective.
Now, as part of that, you would analyze what
the results are, or the differences are between the
correlated binomial methodology and one that’s based on
CDO-ROM.

And you compare the results and see what --

how the two methodologies differ.
In terms of -- reconciling was not the
objective.

The objective is -MR. BUBB:

Well, that’s what you said

15 minutes ago.
What did you mean, when you said it 15 minutes
ago?
MR. HARRIS:

It’s to incorporate the CDO-ROM

results into the correlated binomial.
MR. BUBB:

Now, you used the term ”reconcile.”

MS. NELLES:

Do you mind for definitions if we

jump in?
MR. BUBB:

Sure.

MS. NELLES:

Thank you.

MR. HARRIS:

So the committee wanted to take

FCIC Interview of Gus Harris – May 13, 2010
the results from CDO-ROM.

My understanding was, there

was a new model at that point.

There was a simulation

model that we felt was -- gave results that were more
precise and more consistent across the marketplace.
now we had this model.

But to compare those results to

what we were doing at the time.

And eventually,

[unintelligible] methodology to reflect the CDO-ROM
model.
We compared -- I think as part of that, we
compared the two models to see what the correlated
binomial results look like, [unintelligible] CDO-ROM,
and what we had been doing in the past.
MR. BONDI:
terms here.

Let me try to do this in layman’s

CDO-ROM was a good model, but it didn’t

work for cash flows; but you liked it because it ran
scenario analysis, and so you wanted to tie that
scenario analysis to the cash-flow models that you were
doing?
MR. HARRIS:
MR. BUBB:

Yes.

So what did you mean by -- you said

one of the goals was to reconcile, and you said that the
results converged, in your words.

FCIC Interview of Gus Harris – May 13, 2010
Explain to me more.

What does that mean, ”the

results converge” and “the goal was to reconcile”?
MR. HARRIS:

So when we adopted the enhanced

methodology, the results compared to the old methodology
were not significantly different for the deals that
we -- for the sample of deals that we tested.
MR. BUBB:

In the course of the committee’s

work, did you consider alternative assumptions for the
new methodology?
MR. HARRIS:

I do not -- I personally do not

recall.
And a lot of the work was being done by the
quants that would run the models.

But I personally do

not recall what variables they changed or what results
were being considered.
MR. BUBB:

Who was the lead quant on the

project?
MR. HARRIS:

I forget the individual’s name.

I think we had one person in New York.
two people in London.
MR. BUBB:

I think we had

I don’t recall all the names.
Which of the managing directors on

the committee would have been most familiar with the

FCIC Interview of Gus Harris – May 13, 2010
quantitative analysis?
MR. HARRIS:
MR. BUBB:

I think it would have been Gary.

How about Yvonne Fu?

Would she be

familiar with it?
MR. HARRIS:

I don’t know if Yvonne -- again,

I don’t know -- Yvonne was on maternity leave.

I don’t

know if she was – I don’t know when she left and when
she came back.
MR. BUBB:

What work product was produced by

the committee prior to the publication of the ultimate
specification of the new methodology?
MR. HARRIS:

I believe -- I believe there was

a committee memo.
MR. BUBB:

And what was in the committee memo?

MR. HARRIS:

You write up the methodology and

the testing that was performed.
MR. BUBB:

Who wrote the committee memo?

MR. HARRIS:
MR. BUBB:

I don’t recall.

And was there any -- were there any

intermediary -- any intermediate documents produced on
the way to producing that committee memo?
MR. HARRIS:

I did not recall specifically if

FCIC Interview of Gus Harris – May 13, 2010
there were.
MR. BUBB:

The ultimate report that was

published later in 2005, announcing a new methodology,
characterized the changes, in part, adopting a new set
of correlation assumptions.
Is that consistent with your memory?
MR. HARRIS:

The correlation assumption, I

would have assumed, came from CDO-ROM.

So I don’t know

if that was considered a new correlation framework.
MR. ROSS:

Do you have a copy of the document?

MR. BUBB:

I apologize, I do not have a copy

of the document.
MR. ROSS:

It’s [unintelligible] to remember

whether something was said in the document that you seem
to be quoting from, from five years ago, and you don’t
have the document.
MR. BUBB:

Yes, fair enough.

We’ll do the

best we can.
So with this new approach, did it result in
any change as to the enhancement levels that Moody’s
required for various ratings on cash CDOs?

That is,

changes relative to the prior methodology before the new

FCIC Interview of Gus Harris – May 13, 2010
methodology was put in place?
MR. HARRIS:

To the best of my recollection, I

don’t think it did.
MR. BUBB:

Do you recall that certain FICO

scores and bands for FICO scores were going to be used
in the assumptions?

In other words, subprime, prime,

mid-prime?
MR. HARRIS:

Yes, I do recall that that’s --

that that was going to be used.
MR. BUBB:

Okay.

And do you recall that the

BET model used three types of pockets of assumptions?
One for prime, one for subprime, and one for second
liens?

Do you recall that?
MR. HARRIS:
MR. BONDI:

I do not recall.
What do you recall surrounding the

discussions about the bands of FICO scores that would be
used and form the bases of the assumptions that were
reached in the September 2005 document?

What do you

recall as you sit here today about those discussions?
Anything?
MR. HARRIS:

I do not recall anything

specific, any specific discussions about that.

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:
discussions?

What about any general

What do you recall generally about

discussions surrounding the FICO bands?
MR. HARRIS:

I can’t –- I can’t recall.

MR. BONDI: Do you recall an internal
discussion or debate over whether it had two FICO bands
or three FICO bands for the assumptions?
MR. HARRIS:

I guess I do.

I do believe some

discussion in that regard, yes.
MR. BONDI:

What do you remember about those

discussions?
MR. HARRIS:

I just recall that there were

discussions about where they should draw the lines.
MR. BONDI:

And do you remember if there was

any testing of where to draw lines?
MR. HARRIS:
MR. BONDI:

I do not recall.
And do you recall any particular

persons taking any positions with respect to whether to
have two categories or three categories of FICO bands in
the assumptions?
MR. HARRIS:
MR. BONDI:

I do not recall.
Did Brian Clarkson participate in

FCIC Interview of Gus Harris – May 13, 2010
any of the meetings concerning these assumptions?
MR. HARRIS:
MR. BONDI:

Not to my knowledge.
Was Mr. Clarkson briefed off of

the discussions on the committee?
MR. HARRIS:
MR. BONDI:

Not to my knowledge.
Did you ever talk to Mr. Clarkson

about what the committee was doing and what you were
considering?
MR. HARRIS:

I do not recall talking to him

about this topic.
MR. BONDI:
MR. HARRIS:
at Cohen.

Who’s Christopher Ricciardi?
Chris, I believe, currently works

I think he’s the CFO there or COO or CEO.
MR. BONDI:

Do you still keep in contact with

Mr. Ricciardi?
MR. HARRIS:
MR. BONDI:

I do not.
In 2005 and 2006, when you were

the group MP, where was Mr. Ricciardi?
MR. HARRIS:

I think in ‘05 -- I think in ‘05

he was at Merrill Lynch, and I think in ‘06 he was at
Cohen, but I don’t know for sure.
MR. BONDI:

And is Mr. Ricciardi a person with

FCIC Interview of Gus Harris – May 13, 2010
whom you interacted with when you were group MD?
MR. HARRIS:
MR. BONDI:

Not very often.
Not very often?

You didn’t

interact with him very often?
But you did interact with him a few times?
MR. HARRIS:
MR. BONDI:

Uh-huh, yes.
And can you tell me about the

instances where you did interact with Mr. Ricciardi?
MR. HARRIS:

So, I could recall -- I could

recall one time when –- I think it was rare that we
actually did interact, but I do recall one time when I
reached out to him to tell him that I thought his team
was not treating our team very respectfully.

I heard

some complaints from our people, from our analysts that
his team is not being very responsive to us and was not
treating us with a lot of respect.
MR. BONDI:
this?

Can you put some names behind

Who did you hear -- who did you hear from on your

team that these situations were occurring?
MR. HARRIS:
MR. BONDI:

I do not recall.
Did you talk about anyone

specifically from Moody’s when you talked to

FCIC Interview of Gus Harris – May 13, 2010
Mr. Ricciardi?
MR. HARRIS:
MR. BONDI:

I do not recall.
What did Mr. Ricciardi say in

response to your concerns?
MR. HARRIS:

My recollection is that he took

to heart the concerns, and that he was going to talk to
his team and let them know that they could be a bit more
respectful to the analysts.
MR. BONDI:

Was Mr. Ricciardi’s business

important to Moody’s?
MR. HARRIS:

Well, the -- we find opinions

and -- to the marketplace.

And to the extent there are

deals that people are asking for opinions, we’d like our
opinions to be part of that process, to the extent
Chris -- Mr. Ricciardi was doing deals, we had to – we
were looking to crafting what would be -- we were
interested in the deals that were happening in the
marketplace, and to understand how Moody’s opinions
could help with informing the market of -- or sharing
with the market our opinions.
MR. BONDI:

Who would send you the most number

of CDO deals in 2005?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

I do not recall.
Could it have been Mr. Ricciardi?
It’s possible.

It could have

been Merrill, yes.
MR. BONDI:

Where does Merrill rank in terms

of other investment banks who were using Moody’s for CDO
ratings?
MR. HARRIS:
MR. BONDI:

I do not recall.
Was that something you would have

known in 2005?
MR. HARRIS:

I’m not sure I -- I don’t know if

I would have known specifically the ranking at the
banks.
MR. BONDI:

Did you have a conversation with

Mr. Ricciardi, ever, concerning
MR. HARRIS:

36 CFR 1256.56 - Privacy

I do not recall having a

discussion with Mr. Ricciardi about
MR. BONDI:

36 CFR 1256.56 - Privacy

Do you recall having a

conversation with Mr. Ricciardi concerning any analyst
that Mr. Ricciardi felt were taking too long to rate
deals or being too difficult in rating deals?
MR. HARRIS:

I do not recall having that

FCIC Interview of Gus Harris – May 13, 2010
discussion with Mr. Ricciardi.
MR. BONDI:

Do you recall having that

discussion with anyone at Merrill Lynch?
MR. HARRIS:

I do not recall having any

discussions with anyone at Merrill Lynch.
MR. BONDI:

Did Mr. Ricciardi ever ask you to

take any Moody’s employees off of future deals that he
would send to Moody’s direct?
MR. HARRIS:

I do not recall having that

discussion with Mr. Ricciardi.
MR. BONDI:

What about with anyone else at

Merrill?
MR. HARRIS:
MR. BONDI:

I do not recall.
Did any banker ever ask you to

remove any employees from future deals that they were
going to send to Moody’s?
MR. HARRIS:

I can’t give specifics, of

specific banks.
MR. BONDI:

How about general?

MR. HARRIS:

Yes.

MR. BONDI:

Okay.

MR. ROSS:

Tell me what you recall.

Just -- as I’ve said before, if

FCIC Interview of Gus Harris – May 13, 2010
you’re talking about future deals –MR. HARRIS:
MR. ROSS:

I said the word ”future.”

Yes, but deals that were removed

from which would seem to imply somebody was assigned and
then removed?
MR. HARRIS:
MR. ROSS:

Yes.

I think you’re asking on the

assignments, right?
MR. BONDI:

Let me be clear about that.

Let

me make it clear.
Did any banker ever call you up and say, “On
any deal that we send you in the future, don’t assign
John Smith or so-and-so from Moody’s to that deal.

Make

sure that analyst isn’t on my deals in the future.”
Did any banker ever tell you that?
MR. HARRIS:
MR. BONDI:

Not that way.
Okay.

In any way -- in any way,

did they ever say -MR. HARRIS:
MR. BONDI:
MR. HARRIS:
MR. BONDI:

Yes.
-- “you’ll get more business” -No, no.
-- if they said, “Put this person

FCIC Interview of Gus Harris – May 13, 2010
on” -MR. HARRIS:
MR. BONDI:

No.
Tell me, what bankers would say

about assigning or not assigning certain analysts to
their deals.
MR. HARRIS:

So, again, not being able to

speak about specifics –- the general -- my recollection
of the general discussion is that there are potential
personality clashes, and the dealers -- the dealer,
whoever it would be, would say that, “This individual is
one that we have a tough time, a difficult time working
with.”
MR. BONDI:

Let’s try to put some names with

this.
Any bankers you remember that ever -- bankers
or banks that you ever remember raising those types of
concerns?
MR. HARRIS:

I do not recall the specific --

any specific people, no, I do not.
MR. BONDI:
MR. HARRIS:
MR. BONDI:

Or banks or institutions?
I do not.
Goldman Sachs?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
MR. BONDI:
employees?

I do not.
Merrill Lynch?
I do not.
Credit Suisse?
I do not.
What about any of the Moody’s

Do you remember any of the Moody’s employees

that were the subjects of these calls?
MR. HARRIS:
MR. BONDI:

Yes.
Which Moody’s employees?
36 CFR 1256.56 - Privacy

MR. HARRIS:

would have been one

individual.
MR. BONDI:
MR. HARRIS:

Okay.
At one point,

36 CFR 1256.56 - Privacy

once was

an individual.
36 CFR 1256.56 - Privacy

MR. BONDI:

Who was

MR. HARRIS:

36 CFR 1256.56 - Privacy

was one of our legal analysts.

was an attorney.

I think he worked in

early two thousand still –- 2005 [unintelligible]
2006.
It’s possible that
MR. BONDI:

36 CFR 1256.56 - Privacy

may have been.

Who else?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I do not recall if there were any

other names.
MR. BONDI:

Do you ever remember communicating

to any of the managing directors underneath you
concerning any individuals and their assignments to
future deals?
MR. HARRIS:

I do not recall specifically

talking to them about it, but -MR. BONDI:
MR. HARRIS:

Generally?
-- probably -- yes.

Generally,

yes.
MR. BONDI:

What do you remember generally

talking to the managing directors about
[unintelligible]?
MR. HARRIS:

I don’t know specifically with

regard to, but I can speak generally -- generally, the
discussion would be, we got a call.

And there’s some –

what was brought to our attention was that the rating
process had a lot of friction, and, “What do we do?
Let’s talk to our people.

Let’s figure out how to --

how to react and what do we do in this case.”
MR. BONDI:

And then would you sit down and

FCIC Interview of Gus Harris – May 13, 2010
talk to the analysts, like
36 CFR 1256.56 - Privacy

36 CFR 1256.56 - Privacy

or 36 CFR 1256.56 - Privacy or

and ask them their side of the situation?
MR. HARRIS:

My recollection generally would

MR. BONDI:

So you personally would sit down

be yes.

and…
MR. HARRIS:

In some -- in some cases.

Sometimes those calls may have come from a managing
director regarding the calls, and they may have been
talking to

36 CFR 1256.56 - Privacy

MR. BONDI:

36 CFR 1256.56 - Privacy

And following one of these calls

and following your communications with the analyst, did
you ever decide not to take them off of future deals?
Did you ever say, “Wow, come to think about
it, I don’t agree with that banker.

There’s not

friction here, and you’re going to stay on these deals?
You’re going to stay on deals with them in the future”?
MR. HARRIS:

Not specifically but I -- not

specifically, but I believe that there have been cases
like that.

I believe there have been cases like that.
MR. BONDI:

Do you remember generally who they

would have been with or what particular bank?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I don’t know which particular

bank.
MR. BONDI:

Or any particular analyst?

Any

particular analyst where a banker raised an issue, you
talked to the analyst, and then you decided to keep the
analyst on the deals with that banker?
MR. HARRIS:
MR. BONDI:

I don’t recall.
Okay.

Take the opposite.

Do you

recall taking analysts off future deals from a
particular bank or banker after speaking with the
analyst?
MR. HARRIS:

Again, not knowing the specifics,

I believe there were cases where in future deals we may
not have put an analyst on the deal.
MR. BONDI:

And you mentioned this, you

said ”friction here.”
Why was it important not to have friction?

was it important not to have friction in deals?
MR. HARRIS:

It’s -- having friction is not

problematic.
The -- what we wanted to do, is understand
more the sources of the disagreements between our

FCIC Interview of Gus Harris – May 13, 2010
analysts and the banks.

To the extent that we felt that

the friction, if you will, was warranted and was
consistent with our opinions, we would get involved and
help resolve those issues, we would try to resolve them.
If there were issues, we tried to resolve them.
MR. BONDI:

Can you recount for us one

particular issue where a banker suggested there was
friction, you intervened and resolved the issue?
MR. HARRIS:

So, again, generally, I cannot --

I’m not sure I recall specifics, but there was a lot of
friction in the area of qualitative adjustments in our
rating methodology, deep-discount haircuts,
[unintelligible] investing-grade haircuts, the
reinvestment rules.

And we helped resolve -- we got

involved to help our analysts resolve those issues in
accordance with our methodology.
MR. BONDI:
MR. HARRIS:

Without removing them from deals?
That is correct.

So in that

case, yes.
MR. BONDI:

Without removing them from future

deals with that bank?
MR. HARRIS:

That is correct.

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:
MR. HARRIS:
MR. BONDI:

Let me throw out a few terms here.
Sure.
I think I’ve got them.

But let me

ask you what you [unintelligible], okay?
I think you said
qualitative adjustments,” is that what you said?
MR. HARRIS:
MR. BONDI:

Yes.
I think you said “deep discount

haircuts”?
MR. HARRIS:
MR. BONDI:

Yes.
Okay, and I got “reinvestment

rules”?
MR. HARRIS:

Yes.

MR. BONDI:

Okay.

So tell me what

“qualitative adjustments” are.
MR. HARRIS:

Sure.

Moody’s, maybe starting in

the early two-thousands, started implementing certain
enhancements to -- in our opinions, were enhancements
for the structure of the CDOs.

We wrote about them.

Wrote about them, I think, in 2001, 2002.
had updates to those reports.

And then we

I think it was

a ”frequently asked questions” report.

There were two

FCIC Interview of Gus Harris – May 13, 2010
of them in 2001, and they were followed up with, I
believe it’s called “CDO Rating Factors” series.
don’t how many, but [unintelligible].

And those are --

those are elements -- those are a part of our analysis
that it was hard to put it in a model.

It was sort of

the qualitative assessment of a structure.

So those are

the ones where you want to put them in place to avoid
possible -- for lack of a better word, possible abuse of
the structure, of the structure itself.

So to maintain

the integrity of the structure, we took the position
that regardless of what the mathematical model said, we
thought it was good to have these features.
So in a deep-discount haircut, for example, we
took the position that regardless of what the instrument
that’s rated, if it’s trading at a certain level, the
manager would not be allowed to buy that instrument and
treat it at its higher implied rating.
So if you buy -– so it looks like a very
simple example, something that’s rated Aa, and it’s
trading at 20¢ on the dollar.

We didn’t want the

manager to buy that vehicle, that instrument, put it in
the pool, and treat it as an Aa.

We thought the market

FCIC Interview of Gus Harris – May 13, 2010
was telling us something.
haircut.

That was a deep-discount

They bought it at 20; they treated it at 20.

They didn’t treat it at full par.
MR. BONDI:

I see.

So let me see if I can

break this down.
A CDO that has RMBS as the underlying
collateral -- when the collateral is being selected by
the manager, if they select a Bbb RMBS collateral but
it’s trading at something that you believe is less than
Bbb, you can’t treat it at Bbb for purposes of the CDO?
MR. HARRIS:
framework.

Generally, that’s the correct

I believe you can still treat it at Bbb, but

you don’t get full par benefit.

You get -- if you buy

it at 20, you get 20 in it.
If it’s a CDO, the manager would not want full
par benefit.
MR. BONDI:

It has full par benefit of the

rating?
MR. HARRIS:
your tests.

Bbb and treat it at a hundred for

Because if you get a hundred for your

tests, it has certain ramifications for it, for the way
the cash goes through the waterfall.

So if they haven’t

FCIC Interview of Gus Harris – May 13, 2010
got a hundred, they get to bump off the numerator, if
you will, in the calculation, and get to treat it at Bbb
in your example.
Our view was that if you bought it at 20, you
don’t treat it at a hundred, you treat it at 20.
That was more –- our interest was more on how
it was treated in the waterfall to protect the integrity
and push the cash up to the senior notes.
MR. BONDI:

And this is one of the qualitative

adjustments that you described?
MR. HARRIS:

One of the qualitative

adjustments for that.
There were -- the older vintage CDOs, going
back to that formula that I said before, the par in your
numerator has an impact.

If you get to treat an

instrument at par, it allows cash to flow through to the
non-rated notes.
The position we took, again, I think, the
eight or nine years when we started this, the position
we took is that instrument, even though it’s treated at
par, the way the old deals work is, it’s treated at par
until it defaults.

Once it defaults, it’s treated at,

FCIC Interview of Gus Harris – May 13, 2010
as an example, let’s say 30.

So it goes from a hundred

to 30, once it defaults.
So the position we took is, “You know what?
Nothing really goes from -- let’s say in the context of
CLOs, because I spend most of my time -- I think of B2
loan.

A B2 loan doesn’t go from B2 today to default

tomorrow, in my grades – generally, in my grades.
So what we instituted -- and this applied -to my knowledge, if applied to all types of cash-flow
deals -- once it starts migrating down to default, you
start reducing the benefit in your coverage test.

you no longer take a hundred.
If you get down to -- if the credits get down
to these haircuts in the numerator.
MR. BONDI:

Okay.

I think I got that.

Do you have that one?
MR. BUBB:

Yes, okay.

MR. BONDI:

Qualitative adjustment number 3.

What other qualitative adjustments were there?
MR. HARRIS:

We implemented the watch-list

rule, it’s something to watch for downgrades.
treated as if it’s downgraded.

It’s

And I believe -- I

FCIC Interview of Gus Harris – May 13, 2010
believe the haircuts were -- I believe it was a
one-notch downgrade.

If it was investment grade,

one-notch downgrade; and two if it was below investment
grade.
MR. BONDI:

What other qualitative adjustments

were there?
MR. HARRIS:

Another one was the definition of

a defaulted security.
MR. BONDI:
MR. HARRIS:

[Unintelligible] default security.
The definition of “default” has

an impact on how you treat an instrument in its coverage
task.

Remember before, I said it’s not defaulted or

defaulted.

So out of a hundred or, as an example, 30.

It’s binary.

So we instituted the migration.

If it

migrates, you’ve got to take less than a hundred.

But

what we also did is, we said another one of our
qualitative adjustments was -- the definition of
default -- you know, when does it go to 30, even if it
migrates -- if it migrates eventually to 30, what we
wanted to do, was expand the definition of what
a default is.

So if we think it’s going to default, we

want to get to 30 as fast as possible.

FCIC Interview of Gus Harris – May 13, 2010
The migration rules get you there.
the path.

It starts

But an expansive definition of “default”

captures that last -- it captures the wider definition
of defaults.

So you get into the default market

quicker.
MR. BONDI:

And am I correct in saying the

definition of “defaulted security,” that was something
that evolved over time or came into play in 2005, 2006?
MR. HARRIS:

So I believe the genesis of all

of these features was in 2001, 2002.
MR. BONDI:

Okay.

Even the definition

of “default”?
MR. HARRIS:

I believe so.

The frequently asked questions, it was two
series.

I think it answered 30 broad questions.

And I

think one of them is, “What’s Moody’s definition of
default?”

I believe it’s there.

And if it weren’t

there, it was a follow-up series called ”CDO Rating
Factors,” I believe, where we published [unintelligible]
fact, 15 questions, we had one topic addressed.

And

these were considered qualitative factors.
MR. BONDI:

And you mentioned, I think,

FCIC Interview of Gus Harris – May 13, 2010
reinvestment rules?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
MR. BONDI:

Yes.
Is that a qualitative factor?
[Unintelligible].
Okay, and how does a qualitative

factor work?
MR. HARRIS:

It’s got a bit of -- it’s got a

bit of what we discussed before.

If you buy something

at 20, you can’t treat it at a hundred.

So if you sell

a loan at 20, you can’t buy another loan at 20 and get
the pop, get the increase to a hundred.
And I believe there were other -- I don’t
recall -- I don’t recollect all those specifics.

actually wrote about the reinvestment rule and what a
manager could do and cannot.

We [unintelligible] the

document.
MR. BONDI:

Explain to me which of these

qualitative adjustments, or any other additional
qualitative adjustments that we haven’t already talked
about, where bankers would call or complain about?

You

started off by saying, well, there would be friction
over qualitative adjustments.

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:
there friction about?

Yes.
What qualitative adjustments was
Or was it the universe –- what

was the gambit?
MR. HARRIS:

I think if you had the list of --

I don’t know what the number is, 30 or 40 in front of
us -- and I see a lot of them -- they were often
discussed in ratings.
MR. BONDI:

And it was a situation where

bankers would call up and believe that qualitative
adjustment downward was applied, where it shouldn’t have
been applied; was that the [unintelligible] –MR. HARRIS:
MR. BONDI:
MR. HARRIS:
unreasonable.

The [unintelligible] --- generally of complaints?
The complaint was that these were

Why would –- you know, why would a

manager do this?

Why do you -– why are you taking the

position -- why are you taking the position you’re
taking?

This is not going to happen.
MR. BONDI:

Now, the qualitative adjustments

you’ve described for us seem to be qualitative
adjustments that potentially could be adjustments

FCIC Interview of Gus Harris – May 13, 2010
downward.

Would the qualitative adjustments on the CDO

side, whether it could be potential for adjustments
upward?
MR. HARRIS:

The only one I could think of

would have been -- the watch list worked both ways.

an instrument is on watch for upgrade, we treated it as
if it’s upgraded.

And then there was –- there’s plenty

of data to support the position that the security on
watch to upgrade or downgrade has a different risk
profile than one that is not on watch to upgrade or
downgrade.
MR. BONDI:

Now, when you received any

complaints from bankers about analysts, you said you
would meet with the analyst, talk with the analyst on
occasion, and try to figure out what the nature of the
complaint was, and if there was some validity to it.
Is that generally what happened?
MR. HARRIS:

So if there was a complaint, we

of the management team, and sometimes I, myself, would
reach out and try to understand where the friction is.
To the extent it relates to issues that we
believe are relevant to our opinion, we will be part of

FCIC Interview of Gus Harris – May 13, 2010
the process to support the analyst, the analyst team, to
make our position known to the deal team that these are
provisions that we expect to see in these deals.
MR. BONDI:
investigation?
memo?

And would you conduct an

Would you pull the ratings committee

Would you look at that?

I mean, what would you

do to figure out, did the analyst get it right or does
the banker have a valid point?
MR. HARRIS:

So generally -- I think it’s –-

[unintelligible] speaking about any particular deal -we would meet, the analyst would meet with a manager and
go through the issues and try to identify the ones that
are relevant to our opinion and the ones that may not be
relevant to our opinion.
MR. BONDI:

And how would you do that, though?

How would you go through it?
would you conduct?

What sort of investigation

What would you look at and – you

know, what would you look at for that sort of thing?
MR. HARRIS:

I’m sorry, it would be the deal

team and at least one manager.

Sometimes you may bring

in other analysts to get their opinion.
MR. BONDI:

Uh-huh.

And what would you look

FCIC Interview of Gus Harris – May 13, 2010
at?

Would you look at the rating-committee memo?
MR. HARRIS:

Well, at that point there

wouldn’t be a rating-committee memo because it’s during
the –- oh, so you’re saying if you get the call after a
deal.
MR. BONDI:

Sure, let take the example of

after the deal.
MR. HARRIS:

Okay, so I was thinking in the

context of these issues coming during the course of
the -MR. BONDI:

Just tell me if this is a fair

hypothetical if this happened, and I think you said it
did.

The banker would call you up and say, “I’m having

friction,” or however he described it, ”with a
particular analyst, and I don’t like what he’s doing.”
Might point to some qualitative adjustments.

“I don’t

like what he did with my deals and I don’t want him on
any future deals that I’m sending.”
Is that a fair hypothetical of what actually
occurred?
MR. HARRIS:

I don’t want this person on

future deals; and, yes, there were some issues that came

FCIC Interview of Gus Harris – May 13, 2010
up.

I guess that’s fair.
MR. BONDI:

threat?

Would there sometimes even be a

Like, “I’m not going to send you any business”?
MR. HARRIS:

I do not recall receiving a

threat.
MR. BONDI:

So a hypothetical:

A banker calls

you up, says, “I’m having trouble with this analyst.

don’t want him on future deals.”
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

Okay.
And you said that happened, right?
After a deal.

After a deal

closed, yes.
MR. BONDI:

And that happened?

Okay.

How would you investigate that to determine
whether or not to put the analyst on future deals or
not?
MR. HARRIS:

So we would ask to -- we

generally ask to understand the issues that came up on
the deal and what was being discussed and what was
raised.

To the extent that we determined that -- we

would have expected any rating issue was addressed.
To the extent we thought the issues were not

FCIC Interview of Gus Harris – May 13, 2010
relevant, that was a consideration.
MR. BONDI:

Would you pull the

rating-committee memos and examine those?
MR. HARRIS:

I do not recall pulling the

rating-committee memos.
We would ask the analyst, you know, “What were
the issues that came up?”
position that we took?”
MR. BONDI:

You know, “What was the

And we tried to understand.

Did you recall pulling any

documents in the deal to review those documents?
MR. HARRIS:
MR. BONDI:

I do not recall.
Going back to Mr. Ricciardi.

you recall inviting Mr. Ricciardi to an off-site
Structured Finance Group?
MR. HARRIS:

Yes, I believe he spoke at one of

our off-sites, yes.
MR. BONDI:

And you were the one that invited

him?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
‘06.

Yes.
When was that?
I don’t know if it was in ‘05 or

I don’t -- I don’t know.

FCIC Interview of Gus Harris – May 13, 2010
We had, I believe, one such finance off-site
[unintelligible].
MR. BONDI:

And were there other bankers

invited to that off-site?
MR. HARRIS:

Other bankers?

I don’t recall if

there were other bankers.
MR. BONDI:

He was the only banker at that

particular off-site?
MR. HARRIS:

I don’t know if he was -- I do

not recall if he was the only banker.
MR. BONDI:

Why did you invite Mr. Ricciardi

to that off-site?
MR. HARRIS:

I don’t know why I invited

Mr. Ricciardi.
We wanted to have guest speakers come and
present to the team.
MR. BONDI:

Where was that particular

off-site?
MR. HARRIS:

I think it was in the city at --

I think at the sports complex on Twenty-Third Street, on
the west side, I think.
MR. BONDI:

And did you ask Mr. Ricciardi to

FCIC Interview of Gus Harris – May 13, 2010
talk about anything in particular at that off-site?
MR. HARRIS:
MR. BONDI:

Vaguely.
What, vaguely, do you recall

asking Mr. Ricciardi to talk about?
MR. HARRIS:

What the marketplace expects of

rating agencies.
MR. BONDI:

What Merrill Lynch expected of

Moody’s?
MR. HARRIS:

I do not -- no, that would not --

no, what the marketplace expects of the rating agencies.
MR. BONDI:

What do you mean by ”marketplace”?

Are you talking about the banks?
MR. HARRIS:

Yes -- not banks, just the

marketplace.
So I believe, if my memory serves me right, we
also had chief investing officer from TIAA present.
forget his name.

I think we had multiple perspectives.

And I think the topic -- if my memory serves me right,
the topic was, what does the marketplace expect.
And having the perspectives was very helpful
because the people that we had exposure to and the
discussions we may have with investors and others may be

FCIC Interview of Gus Harris – May 13, 2010
in a different context than what an investment manager
may have or an investment banker may have.

So having a

different –- having a broader perspective to what
they’re hearing would have been helpful for an analyst
to hear.

And that is my recollection.
MR. BONDI:

Well, what went into your decision

to invite Mr. Ricciardi as opposed to a banker at
Goldman or a banker at Morgan Stanley or a banker
somewhere else?

What went into your decision to pick

Mr. Ricciardi?
MR. HARRIS:

I don’t know.

I do not -- I do

not know why I would have -- I may have called others.
I don’t know.
MR. BONDI:

Were you motivated, in part,

because of some friction that was going on between
Moody’s analysts and Mr. Ricciardi?
MR. HARRIS:

Well, I can’t remember the

specifics, but that would be highly unlikely.
MR. BONDI:

Highly unlikely?

MR. HARRIS:

Yes, that is correct.

MR. BONDI:

And what do you remember

Mr. Ricciardi discussing in his remarks?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:
were long?

Short?

Fifteen minutes?

I don’t -- I don’t recall.
Do you remember if the remarks

Five minutes?

Ten minutes?

An hour?

MR. HARRIS:
MR. BONDI:

I don’t recall.
Do you recall Mr. Ricciardi making

any remark to you at the closing of these remarks, such
as, “Gus, is that enough”?
MR. HARRIS:
MR. BUBB:

I don’t recall.

If you’re done with that, if I can

go back, before it gets too…
So, you described the qualitative factors,
which these were not applied within the formal model,
how did you determine what factors ended up being in the
model and what factors were, instead, what you described
as qualitative factors applied back to the model?
MR. HARRIS:
difficult to model.

Some things are just very

For example, the deep discount

purchase, you don’t know when a manager is going to buy
something at 20 or 30 cents on the dollar.
not practical to model that.

It’s just

So I think it’s -- I just

think some things just can’t be put in a formula.

FCIC Interview of Gus Harris – May 13, 2010
they could, we would have considered putting them in the
model.

But I think that would have been one of the main

determinants.
Could it be modeled -- is it really possible
to model something like this?
MR. BUBB:

So these were important factors.

Not that they weren’t important; they were just too
complicated, hard to put in a formula, so it required a
person essentially to evaluate.
description?

Is that a fair

Do I understand this right?

MR. HARRIS:

It required the documents to

prevent activity that we thought conflicted with the
spirit of the structure.
MR. BUBB:
evaluate?

And it required a person to

You couldn’t feed the documents into the

computer and have the computer print it out?

You needed

an analyst or whatever the -MR. HARRIS:

Someone would have to read the

documents.
MR. BUBB:

The documents, as I understand it,

make determinations about which qualitative adjustments
applied?

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

Yes, I think some of the ones you

just talked about before, a deep-discount haircut
applies.

It applies in a cash-flow deal.

Someone buys

something at 20, our position was that it should be
treated at 20.
MR. BUBB:

Were -- are these -- so I initially

assume that qualitative factors –- the reason they are
qualitative factors, is because they aren’t susceptible
to certain mechanical application but, rather, requires
some judgment, some subjective judgment that an
experienced analyst could bring to bear but that no
computer would do on its own.
Is that a fair understanding of some of these
factors?

Or did I misunderstand how this works?
MR. HARRIS:

The factors that I was citing

before, the framework was established.

So an analyst

was expected to follow that framework, and we didn’t
expect him to deviate much from that framework.
So, for example, a security watch for
downgrade, you can’t model that.

The problem maybe you

can, but it would be very complicated to model.

Well,

the investment pattern, manager is going to pursue,

FCIC Interview of Gus Harris – May 13, 2010
they’re going to buy it [unintelligible] watch for it or
not.
So in that case, the definition of the rating
just reflects the facts.

That definition of the rating

included a watch-list provision.

So in these deals, the

Moody’s rating had to be considered to determine the
average credit risk of the pool.
And that test, that rating-factor test is
important to determine what a manager –- how -- the
commission of the deal and what a manager could
purchase.

So we put in the definition of the Moody’s

rating, the watch-list language, within the definition.
MR. BUBB:
disagreement?

So was there ever any room for

Meaning, wanting to also look at this or

come out with one conclusion on a qualitative
adjustment, another analyst, fair-minded analyst,
regional analyst, would look at it and say, “Well,
actually, I think the way that this applies is
different.

It’s this way”?

Or is it purely, there’s a

rule, and there’s no ambiguity and it’s mechanical?
MR. HARRIS:

I think -- I think it’s -- there

could be some -- for some of these, there could be some

FCIC Interview of Gus Harris – May 13, 2010
adjustments.

But the general framework -- we expect the

general framework to be incorporated in the deals.
MR. BUBB:

So it would be the sort of

adjustment, the room within which reasonable people
might differ in the application of these factors, were
these the focus with disputes with the bankers?

Would

they say, “Look, we think that this analyst is
misapplying this.

They really ought to be in the upper

end or the lower end,” or were they simply saying, “This
whole factor is unfair and inappropriate”?
MR. HARRIS:

It was primarily the latter, with

a factor –- the argument was that these factors should
not be included in our deal.
MR. BUBBS:

And were those disputes over

factors, did they ever inform what analysts you can put
on future deals with the issuer?
MR. HARRIS:
MR. BUBB:

No.

So never considered?

MR. HARRIS:

To my knowledge, I’m not aware of

any situation where we subverted from our qualitative
adjustments.
MR. BUBB:

Were you ever concerned that when

FCIC Interview of Gus Harris – May 13, 2010
issuers push back, that would be about personality
36 CFR 1256.56 - Privacy

conflicts, say with

say with another

analyst, that really what’s going on here is, that
analyst is actually a more stringent analyst and is
applying our factors more faithfully?
MR. HARRIS:
possible.

So, the -- it’s -- that’s

To the extent that’s happening, we would

support the analyst.
To the extent issues are being raised that may
be outside the realm of what we would typically expect
with a qualitative adjustment, we would try to query
others on the team and try to get a sense for how
material and significant these issues are.
To the extent that it’s part of doing the
querying with others -- and you think about the team,
there were many attorneys in the team.

So we would

query and to the -- if the sense that we’re getting is
that a lot of these issues are really extraneous to our
opinion -- then in that case, you know, we would -- you
know, we’d think that the comments were unnecessary.
The issues were not necessary -– they were not relevant
ultimately to our opinions.

FCIC Interview of Gus Harris – May 13, 2010
MR. BUBB:

Did

36 CFR 1256.56 - Privacy

raise issues that

were, in your final judgment, unnecessary in your
opinion, more frequently than other analysts?
MR. HARRIS:

I’ve written

36 CFR 1256.56 - Privacy

wrote his employee evaluations early on.

–- I

And from the

first performance evaluation, the answer is yes.
On the first performance evaluation, I
commented that one of

36 CFR 1256.56 - Privacy

challenges is to hone in on

the real issues and try to understand what are the real
deal issues and which may not be real deal issues, that
may not have an impact on our opinion.
And that is something that I believe he -- and
from what I understand -- because I didn’t manage him
later on at his time with Moody’s -- my understanding is
that he continued to have a bit of a challenge with that
part of his job.
MR. BUBB:

Were there analysts that had a

challenge on the other side that –- so, I suspect that
sometimes for deals that were factors that were
[unintelligible] for both sets of qualitative factors,
but nonetheless that were material and important for
Moody’s opinions.

And one of the roles of any analyst

is to beware of this and not simply tick-tick-tick, like
a machine.

FCIC Interview of Gus Harris – May 13, 2010
Were there any analysts who were poor at
catching these material factors, that were more
subjective or required initiative on the part of the
analyst?
MR. HARRIS:

So, one of the things that we

did -- and I think Bill Mays took the lead on this -was to have all the attorneys periodically meet with
each other.

It also allowed an attorney an opportunity

to present to the team what they thought were issues.
We tried to ensure that there was enough communication
so that everyone was pretty much on the same page in
terms of what were the real issues.
So I think, in turn, we had a system where we
felt that the chance of that happening was not -- was
not significant.

So we would assist in that place.

Having said that, I would say that
believe, in my opinion, was on one extreme.
I don’t know if we had a dozen attorneys.

36 CFR 1256.56 - Privacy

And the --

And I think

most of the attorneys sort of fell somewhere in the
middle, focusing what we would have thought was
[unintelligible] issues.

And I think

36 CFR 1256.56 - Privacy

who I

mentioned before, may have been on the other extreme,
where his review may not have been as thorough as some
of the other attorneys.
MR. BONDI:

How did you know about Bill May
72

FCIC Interview of Gus Harris – May 13, 2010
and gathering up the audits at these meetings?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

Well, Bill worked for me.
Uh-huh.
And I think that was a decision

he made several -- several years ago.
MR. BONDI:
MR. HARRIS:
MR. BONDI:

And do you recall that?
Yes.
And is that something you would

have recalled last week?
MR. HARRIS:
week?

Would I have recalled it last

Well, it is on the public site.

would I have recalled it?

I saw it --

What I would have recalled, I

think, two weeks ago, would have been that we had
arranged a forum for the attorneys to talk to each
other.

And that’s what I would have recalled -MR. BONDI:

Something refreshed your memory?

A document refreshed your memory to that event?
MR. HARRIS:

I saw an e-mail from Bill to me

of his achievements in 2005 or 2006.

And I think in

that document, there’s mention of a lawyer’s lunch.
MR. BONDI:

And that’s what refreshed your

recollection to these events?
MR. HARRIS:

To those specific lawyers’ lunch,

the issue of lawyers getting together, I – that I would
have been aware of that.

And I also -- there was no
73

FCIC Interview of Gus Harris – May 13, 2010
refresher.
And I also remember the multi-meetings that we
had, where analysts were allowed to get in front of the
team and share with them some of their -– you know, what
we’ve learned with the most recent deals and what we
should be thinking about for new deals that are coming
in the pipeline.
MR. BONDI:

You saw an e-mail that refreshed

your recollection?
How did you see the e-mail?
a Web site?

Did you see it on

Or where did you see the e-mail?

Someone showed it to you?
MR. HARRIS:
MR. BONDI:

Yes.
A lawyer showed it to you?

MALE SPEAKER:

Why don’t we take a five-minute

MALE SPEAKER:

Sure.

break?

(Pause in interview including off-the-record
discussion by FCIC.)
MR. HARRIS:
MR. BONDI:

Okay, I’m ready.

Put us on mute, Bruce.

MR. McWILLIAMS:
MR. BONDI:

We’re back.

Okay.

And, Mr. Harris, a couple more

questions about Mr. Ricciardi.
Did you ever moderate a panel where you
74

FCIC Interview of Gus Harris – May 13, 2010
invited Mr. Ricciardi to participate on the panel?
MR. HARRIS:

I moderated and he was a

participant?
I don’t recall.
MR. BONDI:

Do you recall a panel on or about

March 30th, 2005, at the Plaza Hotel, called, “Unresolved
CDO issues”?

Does that ring a bell?

The panelists

included Chris Ricciardi, Mark Adelson, John Midlow
[phonetic], and Denise Crawley?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

I moderated that?
I recall that -I recall that a panel where

moderated, and I was on the -- and I don’t if
[unintelligible].
MR. BONDI:

Do you recall being on a panel at

the Plaza Hotel in 2005 or -- were you on a bunch of
panels in -MR. HARRIS:

I was in a lot of -- I was in a

lot of conferences.
MR. BONDI:

I see.

Do you recall being on a panel, either as a
moderator or a participant, with Mr. Ricciardi?
MR. HARRIS:
MR. BONDI:

Yes, I do.
Okay, and was that something you

selected him to be on the panel?
75

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I don’t know.

I don’t know if I

selected him or the conference put the panel together.
I do not recall.
MR. BONDI:

Okay.

And so you would have had

outside interactions with Mr. Ricciardi at the
conferences and the like?
MR. HARRIS:

It’s possible.

And here, I

guess, is one example.
I do not recall specifically other
conferences, other than the one where he and I were at
one conference.
MR. BONDI:

And I just want to try to

understand the interactions that you may or may not have
had with him.
While you were group MD, how often would you
speak to him?
a month?

Would you speak to him once a week?

Once every few months?

Once

How often would you

speak to Mr. Ricciardi?
MR. HARRIS:

My recollection would be once a

quarter or once every six months, which my guess is that
that would not be much different than how much I talk to
other bankers.
MR. BONDI:

I see.

And would these be

conversations that you would initiate, he would
initiate, or both?
76

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:

If -- [unintelligible]

both.

What were the rules for

substituting out collateral on CDS?
MR. HARRIS:

Substituting out during the

underwriting process or after the deal closed or…
MR. BONDI:
general than that.

Well, I was actually getting more

I’m just trying to understand

what -- how it worked for substituting out collateral
after a deal was presented to Moody’s to rate.
get a call to rate a CDO.

So you

And there’s collateral that’s

envisioned for being part of that CDO, what were the
rules for substituting out the collateral for new
collateral during the rating process?

Preceding the

rating process?
MR. HARRIS:

My understanding is that we were

not involved in analyzing the specific security in the
portfolio.

So the specific instrument was not of

primary importance to the rating process.
What was relevant to the rating process is the
quality of the collateral.

So what type of rating -- so

what type of rating will each of the instruments have,
what is the final maturity of the instrument, what’s the
coupon?
My understanding is that the actual instrument
itself was not very relevant to our committee.
77

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:
then?

Then what was -- what was relevant

The rating of the underlying instrument?

The

collateral -MR. HARRIS:
MR. BONDI:
MR. HARRIS:

The maturity, for example.
Uh-huh.
If the deal you’re rating has a

five-year life and the collateral -- you would expect
the collateral to mature in five years.

The coupon that

generates excess interest.
MR. BONDI:

So let me get this straight.

You

have underlying collateral in a CDO, RMBS collateral,
that’s presented as part of the structure.

Let’s say

it’s BBB from Countrywide, and it’s rated in a certain
way.

As long as another Eee was substituted in for

that -- excuse me, BBB -- as long as another BBB was
substituted in, you could take out some BBB collateral
from Countrywide, say, and put in BBB collateral from
Wells Fargo, and that wouldn’t alter the rating process;
is that essentially what you’re describing?
MR. HARRIS:

I’ve never rated an RMBS CDO, but

that is my understanding.

That’s how it works in CLOs,

and that’s how I believe it worked in ABS deals.
MR. BONDI:

Okay.

And if you know, do you

know if, in rating the CDOs, if any of the persons
involved in rating CDOs with RMBS collateral ever looked
78

FCIC Interview of Gus Harris – May 13, 2010
behind the collateral to look at loan-level data?

did you only go as far as the RMBS and the rating of the
RMBS?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

In rating the deals?
Uh-huh.
My recollection is that we -- the

analysis stopped at the tranche level -- at the bond
level, without looking to the collateral.
MR. BONDI:
MR. HARRIS:

And why was that?
In the -- I don’t think it was

possible to actually do the analysis, the full
look-through.
MR. BONDI:

Why?

You just didn’t have the

data or what?
MR. HARRIS:

The data and technology to look

through would have been a substantial investment, which
we have since made.
MR. BONDI:
MR. HARRIS:

Since made, since as of what date?
Well, when we acquired Wall

Street Analytics, we built a library of deals, all the
underlying loans.

So now we can go through and try to

do analytics on a deal-through basis.
MR. BONDI:

And when were you first able to

drill through -- or look at the underlying loan-level
data?
79

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

So, the technology -- without the

data, the technology was -- a lot of technology was done
in, I believe, by the third or fourth quarter of ‘07 -just the technology itself, without the data.
Getting the data has taken another two years.
It was late last year where we had -- that we started
seeing data with the drill-through capability.
MR. BONDI:
existed, correct?

So prior to 2007, the data

I mean, you agree the data was

somewhere out there, right?
data was then created?

And it wasn’t like this

The data has always existed,

correct, the underwriting loan-level data always exists?
MR. HARRIS:
MR. BONDI:

The loan-level data exists.
And so what was missing prior to

2007 was -- for Moody’s -- was the technology, and then
gathering that data and applying it to the technology;
is that fair?
MR. HARRIS:
MR. BONDI:

That’s fair.
Okay.

And in terms of the

technology, did the technology exist prior to 2007?

Not

that it existed at Moody’s, but did it exist?
MR. HARRIS:

I’m not sure.

I don’t know.

I’m understanding that it may have existed in
some form through a company called Intex.
MR. BONDI:

Intex?
80

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

However, my understanding is that

doing the analysis was extremely cumbersome.

So even if

the technology were there than actually can do the work,
it was extremely difficult -- time-consuming.
MR. BONDI:

So was it a business decision not

to invest in the technology prior to 2007?
MR. HARRIS:

Well, we did our investment.

acquired Wall Street Analytics.
closed sooner.

We hoped it would have

And when we acquired the company, one of

the things we wanted to do was build the library and
create the look-through capability -- or drill-down, if
you will, that you referred to.
MR. BONDI:

And this look-through capability,

the drill-down capability on CDOs, who spearheaded that
at Moody’s?
MR. HARRIS:

Spearheaded the acquisition of…?

MR. BONDI:

Not the actual legal acquisition,

but the effort to use the technology to drill down or
look through at the underlying loan-level data, to
collect the data?

Who was spearheading that effort?

MR. HARRIS:
many people.

So, I think this -- I would say

I think there’s really, in 2001 or 2002,

we were writing about the look-through capability.

said, ideally what you would like to do when you analyze
a vehicle, would be to look through and get to the
81

FCIC Interview of Gus Harris – May 13, 2010
underlying assets.
We acknowledged at that time that
functionality was not available or just wasn’t practical
to do that type of work.
So I would say that -- Isaac Efrat, for
example, who was a managing director in 2000, 2001, is
one person who supported the idea of trying to do a
look-through but understanding that it’s a lot easier
said than actually applied.
Jerry Gluck who was also managing director at
that time, was commenting about doing that.
So -- and I would say all the managing
directors.
MR. BONDI:

Are you talking about the desire

to have this technology?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

That is correct.
Okay.
To be able to build it, to

have -- to be able to build something that’s usable.
MR. BONDI:

What changed then in the

marketplace between 2000, 2001, when folks inside
Moody’s were first expressing the desire to have this
technology, and when you ultimately acquired this
technology?
developed?

What changed?

Was the technology

Was the technology cheaper?

Was it more
82

FCIC Interview of Gus Harris – May 13, 2010
readily available?

What changed?

MR. HARRIS:

I think -- I think what changed

is, we started seeing some hedge funds starting to
build -- and some asset managers starting to build that
functionality.

So we started seeing it.

Then we

thought it was probably -- it was then –- we tried to
try to build -- or have access to it.
MR. BONDI:

And what’s the benefit of having a

loan-level data, the technology to look through, so to
speak, through the RMBS, and to the underlying loan
level?
MR. HARRIS:

Well, ideally, it would make the

ratings, it would enhance the quality of the rating
chronology.
MR. BONDI:
MR. HARRIS:

For CDOs?
For CDOs -- for any type of

instrument that has [unintelligible] for a monoline
insurer that is wrapping RMBS deals.
For a commercial real-estate investor that’s
got a pooled commercial mortgage-backed security.
So drill-through, in general, had a lot more
applications than just structured finance.
MR. BONDI:
here.

Mr. Harris, help me understand

If there’s a rating on the RMBS, and you’re

putting together a CDO -- excuse me, you’re rating a CDO
83

FCIC Interview of Gus Harris – May 13, 2010
that’s put together by someone else getting your
suggestions -– also [unintelligible] was getting nervous
there when I said ”put together a CDO.”
me the cue that my question was bad.

He was giving

I appreciate that.

Someone’s putting together a CDO, asking you
to rate it, it has RMBS -- it has ratings underneath it.
If the ratings are good, why bother looking through?

mean, what’s the benefit of looking through?
A rating is a rating, right?
MR. HARRIS:

Yes, so the benefit is that you

have greater precision on how the cash flows to the
underlying tranches will feed up to the CDO.

So, for

example, you’re willing to see -- you could see the
excess interest that’s coming into the deal by drilling
through and seeing what the impact is to your CDO by
running all these deals at the same time, and combining
them at the parent CDO level.

It’s a more -- it’s

greater precision.
MR. BONDI:

So precision -- and precision is

important to the ratings; is that fair?
MR. HARRIS:
MR. BONDI:

Yes.
And you want your ratings to be

precise?
MR. HARRIS:
MR. BONDI:

Yes, that’s true.
So 2001, 2002, internal managing
84

FCIC Interview of Gus Harris – May 13, 2010
directors are expressing the need for this technology,
the ability to look through, that would make the ratings
more precise.
So why wasn’t Moody’s trying to develop this
technology or acquire the technology in 2001, 2002,
2003, 2004, 2005?
MR. HARRIS:

We actually did try to develop it

for a product called “CDO Edge.”
waterfall model that we built.

So CDO Edge was a

And the plan would be to

use that waterfall model to build the library.
MR. BONDI:
MR. HARRIS:

Uh-huh.
But CDO Edge had its limitations,

and it’s hard for us to expand it to other asset
classes.
And at that point, we decided to go and
acquire some.
MR. BONDI:

Expand it to other asset classes,

what was CDO Edge used for then?
MR. HARRIS:

It was used for cash-flow CDOs --

the CLO deals, the RMBS deals.

It was used as a

commercial real-estate deal for -- I believe for CRE
CDOs.
MR. BONDI:
MR. HARRIS:

Uh-huh.
I think it was in the asset, and

it was used, I believe, in Europe, for some European
85

FCIC Interview of Gus Harris – May 13, 2010
CLOs.
MR. BONDI:

Okay.

So CDO Edge was, in fact,

used for CLOs, bonds [unintelligible]?
MR. HARRIS:
MR. BONDI:

I believe so.

I believe so, yes.

And how did that work in

connection with the models then?

How did CDO Edge work

in connection with the models?
MR. HARRIS:

So, CDO Edge had the rating

methodology -- has the rating methodology integrated
into the waterfall model:

So once you call up the deal,

call up the waterfall rules, the actual rating model
that feeds through the waterfall rules is integrated
into that platform.

So, for example, the binomial, for

CLO, the binomial methodology is integrated at the CDO
Edge.

Once you call that the CLO, you can run the

binomial on CDO Edge.
MR. BONDI:

CDO Edge was the platform from

which you ran the models?
MR. HARRIS:
MR. BONDI:

That is -- yes.
Okay.

So then what did you gain

additionally in 2007 that you didn’t already have?
MR. HARRIS:

So, the ability to expand -- or

the decision to look out -- was in it ‘05.

But the -- I

believe it was in ‘05, with the acquisition happening in
‘06.
86

FCIC Interview of Gus Harris – May 13, 2010
The desire was to expand the platform to other
asset classes -- European asset classes, RMBS, autos,
credit cards.

And CDO Edge was not to die.

It was not

a very legible platform and could expand to other asset
classes.
MR. BONDI:

Just to be clear, did CDO Edge

allow you to look through CDOs, to look through the
underlying loan level -MR. HARRIS:

Yes, it did not do that, either.

I do not believe it did that.
MR. BONDI:

Okay.

And then with your

acquisition in 2006, from the development and gathering
of the data, you were eventually able to look through at
the underlying loan-level data?
MR. HARRIS:

The loan technology was done by

late ‘07, and the data itself was available just
recently, the last -- I’d say late ‘09.
MR. BONDI:

Okay, and in terms of this desire

to look through, what efforts were made prior to the
acquisition in 2006 to try to have the technology to
look through a CDO and look through RMBS and to provide
loan data?
MR. HARRIS:

I think it was around the same

time that we were talking to Wall Street Analytics.

actually did talk to Intex also.
87

FCIC Interview of Gus Harris – May 13, 2010
And we looked at both, and the determination
was to – we felt that Wall Street Analytics was more
appropriate for us, for Moody’s.
MR. BONDI:
MR. HARRIS:

And you said that was in 2005?
I believe it was two- -- yes, I

believe it was 2005.
MR. BONDI:

The desire to look through was

first expressed, I think you said, in 2000, 2001.
MR. HARRIS:

Well, it was expressed in the

2000’s, that the ability to drill through is the most
precise way to analyze a deal.

We also acknowledged at

that time that it’s not practical.
MR. BONDI:
MR. HARRIS:

Why isn’t it practical?
Because the technology had not

been built to do that, to do it efficiently.
MR. BONDI:
MR. HARRIS:
2000.

Okay.
It was not available in early

I don’t think I -- I’m not aware of it being

available in the early two thousands.
MR. BONDI:
MR. HARRIS:

Okay.
So we tried to build -- CDO Edge

was one way to try to do it.
MR. BONDI:
MR. HARRIS:

[Unintelligible]?
‘05 we considered Wall Street

Analytics and Intex, and decided to go with Wall Street
88

FCIC Interview of Gus Harris – May 13, 2010
Analytics.
MR. BONDI:

The technology existed with

Wall Street Analytics and Intex, when did the first -when did they have the technology?
MR. HARRIS:

Or do you know?

My recollection is, in talking to

both, Intex had been more advanced in having the
technology than Wall Street Analytics was.
MR. BONDI:

Any sense of when Intex and

Wall Street Analytics first developed the technology?
MR. HARRIS:

Well, Wall Street Analytics was

after we acquired them.
I don’t know -- I don’t know when Intex
developed the technology.
MR. BONDI:

Okay.

And going back to this

concept of substituting collateral, if looking through
gives you more precision, why would you be able to
substitute out on BBB collateral for different BBB
collateral?

If looking through gives you more

precision, if there’s a difference once you look
through, why allow -- why allow banks to substitute out
collateral?
MR. HARRIS:

The methodology was such that we

felt we had a reasonable estimation of what a
look-through analysis would have entailed.
So I do not know if we had drill-through
89

FCIC Interview of Gus Harris – May 13, 2010
capabilities.

It’s hard for me to speculate, but I’m

not sure that we would have asked managers to be running
drills-through to manage their deal.

I think we would

have used a drill-through just to assess the
reasonableness of our parameters.
MR. BONDI:

Were the rules, as far as

substituting collateral on CDOs, particularly RMBS CDOs,
were these rules published?

In other words, if I wanted

to know what these rules were, where could I go?
MR. HARRIS:

I do not know.

Again, I don’t

think that -- I don’t believe that the substitution for
us was a –- was relevant.

I just don’t recall that

being the case.
If it were, I’m not aware if we had written
about it, either.
MR. BONDI:

I’m sorry, “was not relevant for

us,” you mean it wasn’t going to -MR. HARRIS:

I’m not -- I do not recall it

being an issue, replacing an individual RMBS box.

don’t recall that being an issue.
What mattered were the general characteristics
of that instrument, such as its rating, its maturity,
its coupon, et cetera, et cetera.
MR. BUBB:

So as I understand these CDO deals,

there were rules set up in the indenture or somewhere
90

FCIC Interview of Gus Harris – May 13, 2010
that specified some set of requirements for the
collateral, that the collateral manager could require;
is that right?
MR. HARRIS:
MR. BUBB:

That’s right.

And were the ratings based

exclusively on those rules or were the ratings -- did
Moody’s also examine the particular bonds the manager
required at the time of closing?
MR. HARRIS:

If the instruments were

Moody’s-rated, you would not look at the securities.
If it were not Moody’s-rated, the securities
would go through a [unintelligible] process where our
team would -- our RMBS team in this case -- would review
the documents and give us -- give the derivatives team
an estimate of the credit rating.
MR. BUBB:

All right, so what would happen

if -- so there were some -- to make sure I understand
the problems here, Moody’s would send the issuer some
sort of preliminary enhancement levels or ratings
information prior to actual closing of the deal; is that
right?
MR. HARRIS:
MR. BUBB:

I don’t think that’s the case.

Okay, so it would be all the way

up -- you wouldn’t send out any sort of information
about how you were going to rate the deal until closing
91

FCIC Interview of Gus Harris – May 13, 2010
itself?
MR. HARRIS:

There would be -- again, not

being in a rating process for a long time -MR. BUBB:

Sure.

MR. HARRIS:

-- there’s [unintelligible]

interaction between the bank and the analyst.
MR. BUBB:

Yes.

MR. HARRIS:

I’m not aware of that interaction

including subordination levels.

I’m not aware of that.

In other words -- I’m trying to understand
[unintelligible].

I’m not aware of that type of

discussion.
MR. BUBB:

And as Moody’s was working to rate

the deal, do I take it correctly that the deal would be
sort of ramping up in the sense that the manager would
be acquiring assets prior to closing as Moody’s was
working with the issuer and others to do their analysis?
MR. HARRIS:

My understanding is, a lot of

deals would be ramping up and others may close with some
collateral and do the buying after the closing date, and
then you have the ramp-up that may occur for three, six,
nine months between the deal close and [unintelligible].
MR. BUBB:

Now -- and as the deal ramped up,

would the issuer send Moody’s information about the
collaterals it purchased?
92

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BUBB:

I do not know.

But if it acquired

non-Moody’s-rated collateral, then Moody’s would
consider -- they would –- that Moody’s, indeed, get the
information; do I understand that correctly?
MR. HARRIS:

Non-Moody’s-rated collateral, I

think what would have happened is, we get -- we get
the documents for some deals that the manager wants to
acquire, and we would ask that -- in some cases, it’s
possible that we may not even know which deal.

In some

cases, we may know it’s related to the deal; in some
cases, we may not know if it is related to the deal, is
my understanding.
But there were some of the documents, saying,
“Could you give us the risk parameters for these
non-rated deals?”

And we would send the documents to

the RMBS team to analyze the deals.
MR. BUBB:

Now, what would happen if the

issuer prior to closing, substituted out Moody’s rated
collateral for non-rated -- Moody’s non-rated,
collateral not rated by Moody’s?
MR. HARRIS:

They could go through the

estimated -- every security needs some type of
implied -- either a very explicit Moody’s rating or an
implied Moody’s rating.

So you could reference -93

FCIC Interview of Gus Harris – May 13, 2010
there’s several steps, sort of alternatives, one of
which is, you could submit the documents to Moody’s and
Moody’s would give you an estimate of the rating; or you
could look at another rating agency’s rating and adjust
them there.
MR. BONDI:

What would happen if, after

closing, they purchased collateral that had not been
rated by Moody’s?
MR. HARRIS:

My understanding is, they all

needed some type of Moody’s rating -- with Moody’s
rating being an either explicit rating or an implied
rating or an actual estimated rating.
So an implied rating would be, that you could
refer it to another rating-agency rating.
There may be another -- I’m not sure of all of
the steps.

But there’s a Moody’s rating, you get an

implied from another rating agency, or you could send us
the documents and give you an estimate.
MR. BUBB:

Even after the deal closed and you

rated the actual liabilities of the deal, there would
still be this interaction with Moody’s?
MR. HARRIS:

For CDOs in general, yes.

I’m not sure about CMBS – about RMBS deals.
But, yes, that’s very possible.
But in the meantime, the rules indicate how
94

FCIC Interview of Gus Harris – May 13, 2010
you need to carry that instrument.

There’s still a

Moody’s rating.
So if you go down -- the definition of a
Moody’s rating -- at the end, there’s a capsule that
says if you don’t meet any of the above, it goes in as a
Caa or –MR. BUBB:

Yes, right.

MR. HARRIS:
MR. BUBB:

-- some level.

Were there ever disputes between

the issuer, either issuers purchasing collateral in the
final stages of ramp-up or substituting out collateral
for new collateral, in which Moody’s found that
collateral to be low-rated, and the manager disagreed
and thought the implied -- the Moody’s implied rating or
Moody’s rating should be higher?

Was this a common

source of friction?
MR. HARRIS:

I’m not sure if it was common.

It happened, yes.
MR. BUBB

Can you just sort of describe that

friction and how that worked?
MS. NELLES:
MR. BUBB:

How the friction worked?

How the friction worked.

MR. HARRIS:

Well, in any particular types of

deals or -MR. BUBB:

If you could, let’s talk about RMBS
95

FCIC Interview of Gus Harris – May 13, 2010
CDOs.
MR. HARRIS:

So, my recollection of how that

worked would be, we would send the documents to the RMBS
team.

They would assign an estimate.
And I don’t know if the estimate came from us

and then we delivered it to the bank or to the
collateral manager or if they dealt directly.
was a mixture of both.

Maybe it

I don’t know.

To the extent there were disagreements, the
RMBS team on the deal would deal -- generally deal
directly with the -- either manager or the bank or I’m
not sure who they would deal with.

But we would not

be -- we generally would not be part of those
discussions.

That’s my -- that’s what I recall.

MR. BONDI:

The structure in a CDO -- or

excuse me, in rating a CDO that had been structured, do
you recall an instance where you permitted a bank or
banker to do something only after extracting a promise
to them that they want to do a particular action in the
future?
slip?

In other words, did you allow something to

They gave you their word that they wouldn’t do it

again in the future?
MR. HARRIS:
MR. BONDI:

I do not recall.
Do you recall an instance with

Ricciardi involving some collateral or a CDO, a
96

FCIC Interview of Gus Harris – May 13, 2010
multi-sector CDO deal in or around 2005, involving Yuri
Yoshizawa, where you and Ms. Yoshizawa may have obtained
a promise or assurance from Mr. Ricciardi not to do
something with the collateral?
MR. HARRIS:
MR. BONDI:

I do not -- I do not recall.
Do you recall any instance where

there were any concerns with respect to deals that
Mr. Ricciardi was doing and the collateral substitution
involved in those deals?
MR. HARRIS:
MR. BONDI:

I do not recall.
What about more generally?

Are

there any instances or any problems associated with
collateral substitution?
MR. HARRIS:
MR. BONDI:
withdrawn?

I do not recall that.
What would happen if ratings were

Was there a process where ratings might be

issued on a CDO and then later withdrawn?
MR. HARRIS:
MR. BONDI:

Yes.
What would -- how would that

situation operate?
MR. HARRIS:

Generally, it would operate with

a tranche paying down -- paying down, actually, would be
the most obvious example.

I can try to think of other

examples, but that would be the one…
MR. BONDI:

What do you mean by that?

Put
97

FCIC Interview of Gus Harris – May 13, 2010
that in an example.
MR. HARRIS:

The tranche has made all its

payments.
MR. BONDI:

Uh-huh.

MR. HARRIS:

The principal balance has been

paid off.
MR. BONDI:

Uh-huh.

MR. HARRIS:
money.

And investors have received their

In that case, we withdraw the rating.

The bond

doesn’t exist anymore.
MR. BONDI:

And this is after a rating –- this

is after a structure has been rated and been out in the
market for a while; is that what you’re suggesting?
MR. HARRIS:
MR. BONDI:

Yes.
Would there ever be a situation

where ratings were drawn the same day or several days
after they were issued?
MR. HARRIS:

So, there are cases -- and I

don’t know -- and I don’t know the timeline on this, the
time frame -- I’m assuming this is in ‘05 or prior to
‘05 -- where we assigned private ratings.

And I think

that was -- I think that was for the benefit of the
monoline insurers and its limit- -- I think it was a
limitation of our -- of our software.
So in order for us to process that estimate,
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FCIC Interview of Gus Harris – May 13, 2010
to put it through Moody’s internal system, you had to
enter it.

And the way –- my recollection is that once

you put it in the system, it has to go public, then
you’ve got to withdraw it immediately because it was a
private rating.

It was not made available for the

benefit -- in the foreign market, it was available to
the monoline insurer.
MR. BONDI:

These were private ratings on

CDOs?
MR. HARRIS:

It’s a -- it was a private rating

on a CDO, yes.
MR. BONDI:

Uh-huh.

MR. HARRIS:

Yes.

MR. BONDI:

Okay.

For the benefit of the

monoline?

And you said you recall

some instances where that occurred in 2004, 2005?
MR. HARRIS:

Yes, the private ratings, I would

have [unintelligible] for wrapped deals, deals that are
by monoline deal would have gone through that same
process using a private rating, and they didn’t want the
private rating distributed, so you don’t make it
available so you have to withdraw it.

I think that’s

how that worked.
MR. BONDI:

Would the bank also know about the

private rating?
99

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:

I think so.
Okay.

So the private rating would

be shared with the bank or shared with the monoline but
not the public?
MR. HARRIS:

I’m not sure what was disclosed

to the other investors in the deal.
MR. BONDI:

But by Moody’s, Moody’s would only

share the rating with the bank and the monoline in a
private-rating situation?
MR. HARRIS:

Yes, a rating letter -- if the

private rating was communicated through a rating lender,
which was, I believe, distributed to the bank and then
was made part of the closing documents.
And I believe in that private -- in that
letter, I think we had a private rating.
I don’t know if we went straight to -- it’s
possible we went straight to the monolines.

I don’t

know.
MR. BONDI:

And the time frame here, how long

were you issuing private ratings, is that something that
occurred for the last ten years?

Is that something that

only occurred for a limited time period?
MR. HARRIS:

I don’t know exactly; but my

sense would be, it’s not an ‘05 phenomenon.

My guess

would be it was sooner.
100

FCIC Interview of Gus Harris – May 13, 2010
We would have issued those ratings earlier in
the decade, too.
MR. BONDI:
decade?

Uh-huh.

What about later in the

Did the process of issuing private ratings ever

cease?
MR. HARRIS:
MR. BONDI:

(No audible response.)
And were private ratings done then

for cash CDOs with RMBS collateral?
MR. HARRIS:

I think the private rating is not

dependent on the type of deal.

If there’s a monoline

insurer, make it available, they would need that private
rating financial models.
MR. BONDI:

Okay.

And after the private

rating is issued, could the bank in any way change the
structure of the deal or was the deal locked in for
purposes of the rating?
MR. HARRIS:

I would -- I believe the deal was

locked in.
MR. BONDI:

And were there rules as far as

it’s concerned about what the bank could and couldn’t do
after a private rating was issued?
MR. HARRIS:

I think a private rating is

issued when the deal closed and the documents were
finalized.
MR. BONDI:

Okay.

And then when does the
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FCIC Interview of Gus Harris – May 13, 2010
public rating get issued?
MR. HARRIS:
MR. BONDI:

Same time.

It’s there, yes.

The same time?

Okay.

That’s the signal, I think.
Okay, so -- but what makes it a private
rating, if a public rating is issued at the same time?
I don’t get this.

I don’t follow this.

MR. HARRIS:
MR. BONDI:

Yes, so -Help me understand here a private

rating versus public rating, and then how a monoline
comes in here.
MR. HARRIS:

The public rating is tied to the

guarantee.
MR. BONDI:
MR. HARRIS:

Uh-huh.
So the Aaa party is guaranteeing

any -- a tranche, we would assign our public rating
based on that guarantee.
The actual risk of the underlying, what’s
the purest –- just of that tranche without the benefit
of the monoline, that’s a fundamental analysis of the
tranche.

It could possibly be a B, it could be a B2

credit estimate.

But once an Aaa monoline wraps it, a

public rating is Aaa.

That’s the risk for an investor,

because the monoline is guaranteeing that payment.
MR. BONDI:

I see.
102

FCIC Interview of Gus Harris – May 13, 2010
So the private rating is, what the deal would
be if you didn’t have the monoline insurance and the
public rating is with the monoline insurance; is that
basically it?
MR. HARRIS:

Generally, but there could have

been cases where someone says, “Give us a rating based
on both the guarantee and the underlying – and
fundamental analysis.”
MR. BONDI:

And would the public and the

private rating both be reflected in the ratings memo?
MR. HARRIS:
MR. BONDI:

I believe so.
And you suggested -- and I don’t

want to put words in your mouth -- but that the deals
were sort of frozen in place, the banks couldn’t change
the deal once the private rating was flashed.

And that

because the public rating is coming out at the same
time; is that the reason?
MR. HARRIS:

My understanding is, they both

went out the same time, and they issued the letters at
the -MR. BUBB:

What fraction of CDOs involved a

monoline insurer as far as the rating process, the
rating of liabilities that depended on guarantee from a
third party?
MR. HARRIS:

I’m not sure.

I don’t know off
103

FCIC Interview of Gus Harris – May 13, 2010
the top of my head what that number would be.
MR. BUBB:

Every deal has some of this?

MR. HARRIS:

I don’t think it was every deal,

no.
MR. BUBB:

Half of the deals?

MR. HARRIS:

I don’t know.

MR. BUBB: Rare?
MR. HARRIS:

I’m not sure it’s rare, but I

think it’s even less than half.
But I’m not -- I’m not an expert in the RMBS
CDOs, so -- and very familiar with that marketplace, so
I’m not sure.
MR. BONDI:

Would the rating of the monoline

insurer that was providing insurance on a particular
tranche or bonds, would that rating matter to the rating
of the structure?

In other words, if the monoline was

rated Aaa and insuring some bonds, yet another monoline
was rated BBB, energy the same bonds, would the end
rating of the structure be different?
MR. HARRIS:

I would not expect it to be

different.
MR. BONDI:

The health of the monoline doesn’t

matter at all to the alternate rating if there’s
monoline insurance on a CDO?
MR. HARRIS:

I think, generally, I would
104

FCIC Interview of Gus Harris – May 13, 2010
agree.

I’m trying to think of cases where it would but…
MR. BONDI:

Because all the monolines were

Aaa?
MR. HARRIS:

Well, I think there were a couple

single-A monolines to try to enter the space, and I
didn’t think they were successful.
MR. BONDI:

Okay, so the -- and were the

monolines -- the ratings of the underlying monolines
themselves -- forget CDOs -- but the monoline insurers
themselves, MBIA, AMBAC, was that under your watch at
any time during your tenure at Moody’s?
Who was responsible at Moody’s for rating the
monolines themselves?
MR. HARRIS:

I can think of a name but, I’m

not sure who ultimately was -MR. BONDI:
MR. HARRIS:

Sure.

Who was involved in that --

[Unintelligible] and I don’t know

the particular time frame.

Laura Levenstein, Jack

Dorer, Stanislaus Rouyer.
Those names come to mind.
MR. BONDI:
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

Anyone else?
A long time ago, Richard Cantor.
Anyone else?
No, I cannot think of another

name.
105

FCIC Interview of Gus Harris – May 13, 2010
MR. BUBB:

How did the financial difficulties

experienced by -MR. HARRIS:
MR. BUBB:

I’m sorry, what?

How did the financial difficulties

experienced by the monolines affect the ratings of old
CDOs?
MR. HARRIS:

I don’t know.

haven’t –- I haven’t been part of any committees on
CDOs.
years.

[Unintelligible] CDOs, and three and a half
I think three and a half years.
MR. BONDI:

I don’t know.

Were you involved in the subprime

task force or subprime working group?
MR. HARRIS:

A little bit.

initial invitation list.

I was part of the

I did not attend those

meetings.
MR. BONDI:

Were you on an e-mail distribution

MR. HARRIS:

I believe -- I believe initially

list?

I was.
MR. BONDI:
MR. HARRIS:
MR. BONDI:

When were you taken off?
I do not know.
Did you ask to be taken off of the

e-mail distribution?
MR. HARRIS:

I do not recall being asked to be

taken off.
106

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

I’m sorry, did you ask?

Did you

ask?
I get a lot of e-mails that I wish I didn’t
get, and I say, “Take me off your e-mail list.”

Did you

ask to be taken off the subprime working-group e-mail
server list?
MR. HARRIS:
think so.

I do not recall asking.

I don’t

I don’t think I asked to be taken off.
MR. BONDI:

But at some point, you think you

were taken off an e-mail list?
MR. HARRIS:

I think I was taken off at some

time, at some point.
MR. BONDI:

Okay.

In 2007, were you getting

e-mails from subprime working group list?
MR. HARRIS:
was.

I’m not sure.

I probably -- I probably was.

I’m not sure if I
I’m not sure that I

was.
MR. BONDI:

Okay.

Were you briefed or

consulted with on anything that the subprime working
group was doing?
MR. HARRIS:

I cannot recall being involved in

any of the work that they were doing.
MR. BONDI:
RMBS.

In 2007, there were downgrades of

Do you remember that?
MR. HARRIS:

I remember the downgrade.
107

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

And there was a downgrade -- there

were a series of downgrades in July -- July 11th -excuse me -- yes, July -- 10th, sorry -- July 10th, 2007.
Do you remember that?

Roughly, 399 securities

were downgraded on July 10th, 2007?
MR. HARRIS:

I do not recall that specific

MR. BONDI:

But you remember downgrades --

MR. HARRIS:

General downgrades in July --

event.

specific downgrades in July, I do not recall
specifically July downgrades.

But I recall generally,

there were downgrades in ‘07.
MR. BONDI:

And there were some downgrades as

well in October of RMBS as well and some CDOs.

As the

RMBS was being downgraded throughout 2007 by Moody’s,
what were you doing on the CDO side?

Or did you have

any involvement at that point on CDOs with underlying
RMBS or tied to RMBS synthetic CDOs, for instance?

Did

you have any involvement at that point?
MR. HARRIS:
MR. BONDI:

I did not.
You were gone from that group at

that point?
MR. HARRIS:

Effective December of ‘06, I was

formally removed from that asset class.
MR. BONDI:

Okay.

And you mentioned -- what
108

FCIC Interview of Gus Harris – May 13, 2010
were you doing as far as in 2007 -- in April of 2007,
what was your responsibility in April of 2007?
MR. HARRIS:

My main responsibilities were to

basically the new company that we just acquired.

So I

was spending most of my time on Wall Street Analytics
acquisition.
In addition, my other roles were the Managed
Funds Team and the hedge fund operations quality
ratings.
I also had -- I also [unintelligible] for the
U.S. CLO business.
MR. BONDI:

I want to show you a document.

Introduce the document PSI-Moody’s 000014, and it’s
Exhibit 38 from a series of exhibits that were released
to the public by the Permanent Subcommittee on
Investigations in the Senate.

What I’m showing you is

an e-mail dated April 26th, 2007.
author, the recipients:

It shows you as the

Noel Kirnon, Brian Clarkson,

and Richard Cantor.
And you’ll have to forgive me, this is the
e-mail that I have, so I don’t know if there’s other
e-mails that are associated with it.
But before we get into this, let’s identify
the participants on this e-mail.
Noel Kirnon, who is Noel Kirnon and what was
109

FCIC Interview of Gus Harris – May 13, 2010
his role as of April 2007?
MR. HARRIS:

I believe Noel was the head of

the global -- I think Global Derivatives and U.S. CMBS,
I think.
MR. BONDI:
MR. HARRIS:

Okay.

Brian Clarkson?

Brian was the head of Global

Structured Finance.
MR. BONDI:
MR. HARRIS:

Richard Cantor?
I think Richard at that point was

going to credit -- I think he was part of Credit Policy.
MR. BONDI:

Do you remember the e-mail that

you’re looking at there?
MR. HARRIS:

I do not recall this particular

MR. BONDI:

Had you seen this e-mail before?

e-mail.

MR. HARRIS:
MR. BONDI:
MR. HARRIS:

I saw it, yes.
When did you see it last?
I saw it when it was posted two

or three weeks ago.
MR. BONDI:

Okay.

In the e-mail, you said --

and, again, forgive me, this is how I obtained the
e-mail, so -- “Pretty much the same as the non-rated
bucket grows, taking other ratings at face value could
result in inaccurate ratings; and some deals, such as
high-grade ABS deals, the margin for error is very low.
110

FCIC Interview of Gus Harris – May 13, 2010
If in our opinion, 15 percent of the ratings are
inflated, the impact to the CDO note ratings would be
significant.”
“I also refer to the Jerry Gluck study issued
a couple years back.

That study analyzed the impact on

our CDO ratings as the non-rated bucket grows.”
Can you describe to me everything you’re
trying to communicate here to Mr. Kirnon, Mr. Clarkson,
and Mr. Cantor?
MR. HARRIS:

Again, I don’t recall what the

context is for this communication, but my semi-guess
would be that if we were to look at other rating
agencies’ ratings at face value, what would the impact
be to giving these CDO ratings.
MR. BONDI:

Why do you -- why did you send

this e-mail?
MR. HARRIS:

I don’t know.

I don’t know why.

I -- someone probably asked me to look at it.
MR. BONDI:

So this wouldn’t have been in part

of your normal course –MR. HARRIS:
MR. BONDI:

No.
-- of your duties and your

position as of April 2007?
Someone asked you specifically about an issue
and you appear to be responding; is that what -111

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:

Yes.
-- you’re suggesting?

Okay.

I want to direct your attention to the
sentence that says, “If, in our opinion, 15 percent of
the ratings are inflated, the impact of the CDO note
ratings would be significant.”
Did someone express to you that there was an
opinion -- did someone express to you an opinion that
15 percent of the ratings were inflated?
MR. HARRIS:

I don’t recall of anyone

expressing that opinion.
I think -- in trying to think about what it
may mean in this context, is if the ratings from the
other rating agencies were higher than -- if the ratings
from the other rating agencies underestimated the risk,
the true risk of the collateral, then the impact on the
CDO note ratings would result in -- then the CDO notes
would be downgraded.
MR. BONDI:

And do you recall any action being

taken related to what you’ve described in this e-mail?
MR. HARRIS:
MR. BONDI:

I do not recall any action taken.
Okay.

You said, “I also refer to

the Jerry Gluck study issued a couple years back.”
What is “the Jerry Gluck study issued a couple
years back”?
112

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I think what I may have been

referring to is, we did a study that compared the
impact -- that looked at the impact on the ratings of
the CDO if the -- if the underlying ratings -- if the
underlying -- if the -- if our opinion on the underlying
ratings was different than what our competitors were,
they’d be available.
MR. BONDI:

And was this Jerry Gluck study,

was it public?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
MR. BONDI:

I believe so.
Do you remember what it’s called?
I cannot recall what it’s called.
And you refer to it “as the

non-rated bucket grows, taking others, rating others at
face value…”
By “non-rated bucket,” are you referring to
buckets of securities that were rated, but just not
rated by Moody’s?

Is that what you’re getting at there?

MR. HARRIS:

Or -- or possibly -- yes, an

unrated bucket would be -- non-rated Moody’s bucket
grows.

I think that’s what I would have been referring

to here.
MR. BONDI:
MR. HARRIS:

I see.
And the study, that’s what

Jerry’s study -- Mr. Gluck’s study addressed.
113

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

And do you recall, outside of the

CDO, do you recall having conversations with either
Mr. Kirnon, Mr. Clarkson, or Mr. Cantor having the
impact to CDOs as RMBS downgrade?
MR. HARRIS:

So, specific discussions, no.

But we did publish study that assessed the potential
impact on the CDO note ratings.

I think the RMBS

ratings go to the -- the RMBS ratings changed.
MR. BONDI:

What study are you referring to?

MR. HARRIS:

I think it came out around the

same time that this report -- I don’t remember the name
of the report.
MR. BONDI:

And were you involved in that

study?
MR. HARRIS:

I helped -- yes, I was -- I was

involved -- yes.
MR. BONDI:
MR. HARRIS:

What was your involvement?
I helped.

I worked with the team

to think about how we could present our results and what
our study should entail.
MR. BONDI:
MR. HARRIS:

Who was part of that team?
I don’t know the people off the

top of my head.
The authors are on the report.
MR. BONDI:

Were you listed as an author?
114

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:

I do not believe so.
And, in or around the time of this

report, do you recall them having conversations with
Mr. Kirnon or Mr. Clarkson or Mr. Cantor concerning the
impact on CDOs if RMBS was downgraded?
MR. HARRIS:

I do not recall having

discussions about the results.
The study -- I recall the study was triggered
by Mr. Clarkson asking us to do the work.
think the study was.

That’s what I

That’s what I recall.

MR. BONDI:

“Asking us,” who is “us”?

Asking

you and other people?
MR. HARRIS:

Asking the -- I don’t know if it

was the managers of the derivatives team and I then
being [unintelligible] the CLO, was one of the
management team.
MR. BONDI:

So the study that you’ve described

was instituted at the direction of Mr. Clarkson?
MR. HARRIS:
MR. BONDI:

I believe so.
And how do you remember him asking

or instructing the study?
remember an e-mail?

What do you recall?

Do you

Was it phone conversations?

Did he

call you in his office?
MR. HARRIS:

I don’t recall the mode of

communication.
115

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

And what do you recall at all

about what Mr. Clarkson said to you in instituting the
study?
MR. HARRIS:

I don’t know -- I don’t know

specifically.
MR. BONDI:

How about generally?

What do you

recall?
MR. HARRIS:

Generally, we got to get a report

out there to talk about the potential impact to the CDO
tranches giving changes in RMBS tranches.
MR. BONDI:

And why did he say you needed to

get a report out then?
MR. HARRIS:

He didn’t -- he didn’t tell me.

I’m not sure.
MR. BONDI:

Okay.

And was there anyone from

the RMBS side that was part of this group studying the
impact of downgrades on the CDOs?
MR. HARRIS:
MR. BONDI:

I don’t recall.
Were you involved in any way in

the downgrades in 2007 of RMBS or CDOs?
MR. HARRIS:

Not that I recall, no.

MR. BONDI:

Do you recall having any

conversations with Mr. Clarkson concerning the ratings
of CDOs in 2007?
MR. HARRIS:

Only one communication.
116

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

Okay.

MR. HARRIS:

He asked of a hypothetical for

what happened to the CDO ratings before the RMBS
securities defaulted.
MR. BONDI:

What did you say?

MR. HARRIS:

I believe -- I don’t know the

details, but I did talk about -- from what I recall,
I talked about the timing, if it defaulted ten years
from now, that would be different than if they default
tomorrow.
I talked about the excess spread -- the deals
had excess spread.
recall.

[Unintelligible], from what I

I talked about the haircuts [unintelligible]

cash.
MR. BONDI:
that.

Let me see if I can help you on

I think I may have a communication.
I’m showing you what has been marked

Moody’s-COGR 0019871 through -872.

It appears to be a

series of e-mails starting, first, with an e-mail from
Robert Glauber to Brian Clarkson dated July 19th, 2007.
Let’s pause there for a moment.
Who is Robert Glauber?
MR. HARRIS:

Do you know?

He’s a -- he is a board member.

From Corporates.
MR. BONDI:

Okay.

And Mr. Glauber, in his
117

FCIC Interview of Gus Harris – May 13, 2010
e-mail to Mr. Clarkson, raises a couple questions.

you see that on the second page, 19872?
MR. HARRIS:

Yes.

MR. BONDI:

Okay.

Let’s take a look at those

questions.
First, he says ”Dear Brian:

My reading has

raised a couple of questions” -- this is July 19th, 2007.
“One, the press has reported that S & P expects
cumulative loss of subprime MBS to average 11 to
14 percent.

I’ve heard 15 percent most recently.

the same time, the press reports, we expect losses in
the 6 to 8 percent range.

Has the press reported this

correctly?”
And his second question is, “My understanding
is that CDO pools constructed out of BBB and BBBtranches of MBS have, roughly, 8 to 10 percent
over-collateralization for the entire pool.

With the

loss projections above, does that mean that the entire
CDO would be wiped out?”

Question mark.

Paren “I gather that the Aaa tranches of these
CDOs are selling at 40, which is certainly less than a
hundred but well over zero.”
And he closes his e-mail.

That e-mail from

Mr. Glauber is forwarded for Mr. Clarkson on July 20th at
8:12 a.m. to Yuri Yoshizawa and yourself titled, by the
118

FCIC Interview of Gus Harris – May 13, 2010
way, ”Subprime.”
And then above that, if you see, there’s an
e-mail from you to Mr. Clarkson, copying Yuri Yoshizawa,
dated Friday, July 12th -- excuse me, dated Friday,
July 20th, 2007, at 8:50 a.m.

So it looks like

40 minutes later or so, or 38 minutes later, after -38 minutes after you received the e-mail from
Mr. Clarkson, you replied to Mr. Clarkson’s e-mail.
Do you see that?
MR. HARRIS:
MR. BONDI:

(No audible response.)
Okay.

And, first of all, is this

the communication that you were referring to a few
minutes ago with Mr. Clarkson?
Have you seen this communication before?
You obviously sent it.

But since sending it,

have you seen this communication?
MR. HARRIS:

I may have seen it, yes.

MR. BONDI:

Have you seen it within the last

MR. HARRIS:

I have not seen it within the

week?

last week.
MR. BONDI:

I want to ask you what you mean in

some of these points here.
First, you said, “Brian, if we assume that all
the underlying RMBS assets lose 100 percent of their
119

FCIC Interview of Gus Harris – May 13, 2010
value,” parent, “the most severe scenario,” end of
paren, “then the CDO would be completely -- would be
completely eventually wiped out, but there are several
offsets to CDO losses.”
MR. HARRIS:

It could be -- yes, it could

be -- it could be completely wiped out, but there are
offsets, yes.
MR. BONDI:

Okay.

And I just want to ask you

about what you mean in some of these offsets.

If you

don’t mind, we’re just going to walk through it.
Number one, you have, “Average CDO exposure to
2006 vintage Baa.”
And is that essentially BBB?

We have B, and

then little A, little A?
MR. HARRIS:
MR. BONDI:

That is correct.
Okay.

Do you mind if I just

say “Triple B”?
MR. HARRIS:
MR. BONDI:

Fine.

Absolutely.

Is that what you call it, or do

you call it something else?
MR. HARRIS:
MR. BONDI:

Baa.
Oh, you call it Baa?

This BBB is S & P; is that right?
MR. HARRIS:
MR. BONDI:

Yes, that’s right.
Okay.

I don’t want to -- I don’t
120

FCIC Interview of Gus Harris – May 13, 2010
want to use S & P terminology if I’m talking to a
Moody’s person.
Baa and then you have HEQ.
What is HEQ?
MR. HARRIS:
MR. BONDI:

“Home equity.”
”Home-equity tranches”?

So these are second liens?
MR. HARRIS:

I assume so.

I’m not an RMBS

expert, but I assume home equity would be a second lien.
MR. BONDI:

Okay, let me back up.

Did you write this e-mail?
MR. HARRIS:
MR. BONDI:

Yes, I did.
Okay.

Did someone write the

e-mail for you?
MR. HARRIS:
MR. BONDI:

I wrote it.
Okay.

Did you consult anyone in

the 38 minutes between Mr. Clarkson’s e-mail and your
response?
MR. HARRIS:

I don’t recall that I consulted

anyone.
MR. BONDI:

Okay.

Well, let’s go back to the

e-mail.
“Baa, HEQ, home-equity tranches is close to
10 percent, not 100 percent,” paren, “Yuri will need to
confirm this.”
121

FCIC Interview of Gus Harris – May 13, 2010
Do you see that?
MR. HARRIS:

Yes.

MR. BONDI:

Okay.

So what you mean by the

exposure is 10 percent?
MR. HARRIS:

I think what I was implying, was

that the loss number that Mr. Glauber related to 2006
deals.
So maybe those loss numbers are of home eq -2006 home equity tranches.

That’s what I think I was

implying here.
So the loss estimates for Mr. Glauber pertain
to 2006.
MR. BONDI:
MR. HARRIS:
MR. BONDI:

“Home-eq”?
Home equity in tranches.
Okay.

And you say, “Never left.

There are few deals with very high exposures over
50 percent.

The average exposure to subprime in the

2006 cash and hybrid CDOs is 45 percent as per our
special comment with 41 percent greater than or equal to
Baa for the mezz deals and only 1 percent greater than
or equal to Baa for the high-grade deals.”
Can you put in layman’s terms what you mean by
that sentence, starting with, “The average exposure to
subprime in the 2006 cash and hybrid deals”?
MR. HARRIS:

So, I think what I was trying to
122

FCIC Interview of Gus Harris – May 13, 2010
make a distinction here -- I think what I’m trying to
say is, the loss results -- the loss estimates that
would be made available at the time were for 2006
vintage deals.
So, what I’m saying here is that the RMBS
deals appear to have more than just 2006 vintage in
their collateral -- I think.
MR. BONDI:

[Unintelligible.]

Tell me what you mean by the

phrase, though, when you say, “The average exposure to
subprime in the 2006 cash hybrid deals.”

You say, “It’s

45 percent as per our special comment.”
What do you mean by ”as per our special
comment”?
MR. HARRIS:

That was the research report that

I mentioned before, where we looked at the impact on the
CDO ratings, giving a change on the RMBS ratings.
MR. BONDI:
MR. HARRIS:

I see.
So in that comment -- in that

special comment, I think what we did is, we showed the
distribution by vintage for the RMBS CDOs.
MR. BONDI:

Okay.

And 41 percent greater than

or equal to Baa for mezz deals, and only 1 percent
greater than or equal to Baa for high-grade deals?
So basically what you’re saying is, there’s a
41 percent exposure for 2006 cash or hybrid deals that
123

FCIC Interview of Gus Harris – May 13, 2010
were mezz deals?
MR. HARRIS:

I believe so, yes.

I think

that’s what I’m getting at, yes.
MR. BONDI:

On most of these assets are from

2006 vintage RMBS transactions.
You say, “We’re still trying to get our arms
around the synthetic deal data, but it looks like the
average exposure to subprime in those deals is much
higher, around 80 percent.”
What do you mean by ”we’re still trying to get
our arms around the synthetic deal data”?
MR. HARRIS:

The portfolio composition was not

readily accessible for the synthetic deals as it was for
the cash-flow deals.
The cash-flow deals were being processed and
databased, whereas for the synthetic deals, I think it
was more and more [unintelligible].

That’s what I think

I was getting at, that we’re still collecting the data.
MR. BONDI:

So to back up to July 20th, 2007,

you didn’t feel like you had gathered all the data with
respect to subprime exposure on synthetic CDO deals?
MR. HARRIS:

I think for any particular deal,

I believe, would have been collected.
it.

It’s aggregating

The way we did it, I think is the aggregation.

It’s bringing it all together being able to aggregate it
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FCIC Interview of Gus Harris – May 13, 2010
and look at the different -- to slice and dice it, if
you will, to look at various -- to do finer cuts at the
collateral, in an aggregated basis.
MR. BONDI:

But you say, “It looks like the

average exposure to subprime in those deals,” meaning,
the synthetic CDO deals, “is much higher, around
80 percent.”
What’s your basis for saying that the exposure
was around 80 percent?
MR. HARRIS:

It would have been -- I think it

would have been through discussions with people that are
familiar with that market.
MR. BONDI:
MR. HARRIS:

Do you think it was Yuri?
Yuri, or it could have been -- it

could have been part of our -- part of the work, part of
getting the study out, we may have been collecting that
data.
MR. BONDI:

Anyone else you would have talked

to, to learn this 80 percent number?
MR. HARRIS:

I don’t know.

I don’t know who

would have thought.
MR. BONDI:

When you were writing this e-mail

to Mr. Clarkson, did you consult in documents or look to
any data?
MR. HARRIS:

I don’t recall if I did or
125

FCIC Interview of Gus Harris – May 13, 2010
didn’t.
MR. BONDI:

Continuing on, you say, “The

majority of this collateral is going to be in the Baa
range from the 2006 vintage RMBS deals.”
Do you see that?
MR. HARRIS:
MR. BONDI:

Yup.
Do you know of any synthetic deals

that were being rated by Moody’s in 2007, reference 2006
RMBS collateral?
MR. HARRIS:
MR. BONDI:

I do not know.
“There weren’t many synthetic

deals in 2005,” you continue, “, nor were there any
high-grade synthetic deals.”

Do you see that?

So your focus was on the 2006 RMBS vintage; is
that correct?
MR. HARRIS:

Yes.

MR. BONDI:

Okay.

At any time, did you have

any conversations with anyone at Moody’s about whether
it was appropriate to rate either cash CDO deals or
synthetic CDO deals as you were downgrading, or
contemplating downgrading RMBS of the 2006 vintage?
MR. HARRIS:

No, I think that Eric Kolchinsky

had expressed some concern to me.
MR. BONDI:

And what did Mr. Kolchinsky

express to you?
126

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I don’t recall the specifics of

the discussion, but he had some concerns about the
underlying RMBS ratings.
MR. BONDI:

The underlying RMBS that you’re

describing in this paragraph?
MR. HARRIS:

The 2006 vintage?

I’m not sure -- I do not recall

talking about specific vintages.
MR. BONDI:

Okay.

response to his concerns?

And what did you say in

What did you say in response

to Mr. Kolchinsky?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

So -What did you tell him?
Again, I was not his -- at that

point, I was not his manager.

And the -- the

discussions about the methodology are ongoing.
part of our job.

That’s

We’re always discussing ways to

enhance methodology, make it better, and debate the
issues.

I recall that my suggestion to him was to talk

to his managers and discuss his concerns, discuss it in
a committee setting, and to possibly reach out also to
the RMBS team and get a better sense for how they’re
rating deals.
MR. BONDI:

Approximately what time period was

this that you had the conversation with Mr. Kolchinsky?
MR. HARRIS:

I do not recall when that would
127

FCIC Interview of Gus Harris – May 13, 2010
have been.
MR. BONDI:
MR. HARRIS:

Was it in 2007?
It would have been sometime in

‘07.
MR. BONDI:

Would it have been early 2007,

mid-2007, late 2007?
MR. HARRIS:

I don’t remember when it would

have been.
MR. BONDI:

Okay.

Would it have been around

the time of this e-mail?
MR. HARRIS:
MR. BONDI:

It’s possible.

I’m not sure.

Did you share Mr. Kolchinsky’s

concerns?

I mean, in other words, did you also have

concerns?

Not shared and tell other people -- I should

be very precise on that.
Did you have similar concerns as
Mr. Kolchinsky?
MR. HARRIS:

So, for -- there were some

concerns about the performance of these deals around
this time, I included public –- well, the researchers
are writing about it, investors were asking about it.
MR. BONDI:

And, Mr. Harris, I apologize, but

I just want to make clear.

I wanted to know if you had

similar concerns?
MR. HARRIS:

I don’t know if I specifically at
128

FCIC Interview of Gus Harris – May 13, 2010
this time had any particular concerns about these
instruments.
MR. BONDI:

Let’s just take 2007.

Did you have concerns at any point in 2007
that were similar to the concerns that you’ve heard
about -- from Mr. Kolchinsky concerning the CDOs and the
rating of CDOs [unintelligible]?
MR. HARRIS:

I first -- well, I had

questions -- I had some questions about the performance
of the deals sometime in, roughly, the middle of ‘07.
MR. BONDI:

Performance of existing deals or

performance of deals that were being rated at the time?
MR. HARRIS:

I believe the statistics at that

time -- I was looking at the statistics -- would have
been deals that were outstanding.
MR. BONDI:

Okay.

And with respect to these

questions, what did you?
MR. HARRIS:

Well, the team -- the team that

monitors the RMBS deals and rates the deals, they were
dealing with the surveillance issues that may be
related, but changes to the underlying ratings.

It was

the managing team that was responsible for -– for that
work.
MR. BONDI:

You said you had some questions.

And I want to know, what did you do in response to the
129

FCIC Interview of Gus Harris – May 13, 2010
questions that you had?

Pick up the phone and call

people, did you have a meeting [unintelligible] office?
You said you had some questions.
Were those questions that you posed to other
people?
MR. HARRIS:

I had -- yes, I had suggested to

Eric and to the management team to talk to the RMBS team
to get a better sense about all this information that
we’re hearing about, and to try to better understand the
performance of the underlying deals.

That’s what I

suggested to the management team and Eric.
MR. BONDI:

Now, did Mr. Kolchinsky express to

you, though, concerns about deals that were in the
pipeline to be rated at this time?
MR. HARRIS:

CDO deals?

I do not know the specifics, but

I believe that was the context.
MR. BONDI:

Okay.

And did you have any

concerns or questions about those deals?
Let’s start -- let’s not break that up.
Did you have any concerns about those deals,
or the ratings of those deals that were in the pipeline
that were to be rated?
MR. HARRIS:
about those deals.

I had no basis to have an opinion

I wasn’t aware of -- I wasn’t aware

of what was being done [unintelligible] analyzing those
130

FCIC Interview of Gus Harris – May 13, 2010
deals, I wasn’t aware of the dialogue that the team may
have been having with the RMBS team.
MR. BONDI:

Was Mr. Kolchinsky the one

involved in rating those deals?
MR. HARRIS:
MR. BONDI:

I assume so.

I’m not sure.

So you had Mr. Kolchinsky’s basis;

is that fair?
MR. HARRIS:

Mr. Kolchinsky expressed to me

his concern, yes.
MR. BONDI:

Okay.

So Mr. Kolchinsky was

involved in rating the deals, the CDO deals.

expressed concerns to you.
Do you believe that that gave you a basis to
be concerned as well?

The person who is rating the deal

goes to you and expresses concerns about the deals that
are being rated?
MR. HARRIS:

I talked to the management

team -– well, the management team included -- I talked
to his management team, and I suggested that they
address the issue.

It’s hard for me to make a basis

about if those concerns are valid or not.
There are many opinions in a rating process -many views.

And what we try to do is flesh those out

and have people discuss it, and try to arrive at a view
that we believe as an organization –- as a group, I
131

FCIC Interview of Gus Harris – May 13, 2010
guess in a committee setting, that we believe is the
appropriate result.
My role was not to be -- I was not in a
committee process.

My role was to make sure that I

expressed to people the importance of just talking to
each other and encouraging them to reach out to the RMBS
team.
MR. BONDI:
management team.

You said you talked to the

Who did you talk to in response to

Mr. Kolchinsky’s concerns that he expressed to you?
MR. HARRIS:

I believe Yuri, Yuri was aware

MR. BONDI:

Yuri was aware because you made

MR. HARRIS:

Yuri -- it’s possible that I

of --

her aware?

called her and she may have known.

I don’t specifically

how she [unintelligible].
MR. BONDI:

Who do you remember, though,

communicating or passing along Mr. Kolchinsky’s concerns
to?
MS. NELLES:
[unintelligible]?

They did not mutually

Right?

He could talk with somebody,

and they can also know the [unintelligible].
MR. BONDI:

I understand.

What I want to know is, Mr. Kolchinsky
132

FCIC Interview of Gus Harris – May 13, 2010
expressed some concerns to you, and you said you talked
to the management team involved.
Who did you talk to?

After hearing

Mr. Kolchinsky’s concerns, who did you then talk to?
Did you talk to Yuri?
MR. HARRIS:

Yes, I did discuss -- I did

have -- I cannot recall the specific discussion with
Yuri, but I was comfortable that Yuri was aware of the
concerns.
MR. BONDI:
MR. HARRIS:

Did you talk to Noel Kirnon?
I do not recall if I had talked

to Noel Kirnon.
MR. BONDI:

Did you talk to Brian Clarkson?

MR. HARRIS:

I do not recall if I talked to

Brian Clarkson.
MR. BONDI:

Okay.

Who else, other than Yuri,

do you recall talking to?
MR. HARRIS:

I believe at that point Jonathan

Polansky was also aware of the concerns.
Jonathan was responsible you believe for the
Surveillance, I think.
MR. BONDI:

So do you remember talking to

Mr. Polansky?
MR. HARRIS:

I remember having discussed with

Mr. Polansky.
133

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

Who else do you remember having a

discussion about, about Mr. Kolchinsky’s concerns?
MR. HARRIS:

I do not recall who else I had

those discussions with.
MR. BONDI:

Do you remember having a

discussion with Andy Kimball about Mr. Kolchinsky?
MR. HARRIS:

I do not recall having a

discussion about Mr. Kimball.
MR. BONDI:

Do you remember having any

discussions with Dr. Witt?
MR. HARRIS:

Gary Witt?

I do not recall having any

discussions with Mr. Witt.
MR. BONDI:

Did you value Mr. Kolchinsky’s

opinions?
MR. HARRIS:

I value all the analysts’

opinions.
MR. BONDI:

Did you think that those opinions

were such that it required additional examination?
MR. HARRIS:

I believe that there was

significant focus on this issue at that time.
MR. BONDI:

At the time Mr. Kolchinsky

expressed his concerns to you about rating of ABS CDOs
while RMBS was being downgraded, did you, yourself, form
any concerns?

Did you become concerned?

I know you said you had questions, but did you
134

FCIC Interview of Gus Harris – May 13, 2010
become concerned?
MR. HARRIS:

Eventually.

I don’t know when it

was, but eventually, in the downgrade started occurring.
But I don’t know exactly when -- when that would have
been.
MR. BONDI:

At some point after Mr. Kolchinsky

came to you, you became concerned?
MR. HARRIS:
MR. BONDI:

I believe so.
Okay.

How long after?

A week?

Two weeks?
MR. HARRIS:
don’t recall when.

I don’t recall specific -- I

That was [unintelligible].

MR. BONDI:

And were you involved in any

follow-up conversations with anyone concerning
Mr. Kolchinsky’s concerns?
You said you talked to Yuri.
Did you talk to -- did you follow up with her
after the conversation you had with her?
MR. HARRIS:
MR. BONDI:

I don’t recall following up.
Let’s go back to the e-mail here.

On number two of the e-mail, you said there
was subordination in the CDO:

“A, double-A” -- S & P

speak, it would be “Triple A” –- right? -- It has about
20 percent to 35 percent subordination, Aa.
Is that how you say it, “A, little A”?
135

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:

“Double A.”
“Double A”?

Sorry.

Aa, about -MS. NELLES:

“A double-A” is “Triple A” by the

way, so you can use that.
right.

If you want to get them

I’ll let you know.
MR. BONDI:

Please, correct me if I’m getting

the speak wrong.
Okay, Aaa had about 20 to 35 percent
subordination, Aa has about 15 percent, A about
10 percent, and BBB, or Baa, close to 5 percent.
And you go on in this e-mail.

I want to draw

your attention, though, to the sentence that begins
with -- and please read the whole paragraph, but I want
to ask what you mean by, “The static synthetic deals are
generally structured to be much closer to the rating
hurdles and are, therefore, on the low end.”
What do you mean by that?
MR. HARRIS:

So, I think what I was referring

to is when rating a tranche, there’s certain hurdles
that we -- [unintelligible].

So it’s an expected loss,

actual numbers.
So an Aa2, for example, would have an
expected-loss hurdle.

When you do the analysis in the

plot work, we checked the expected loss and compare it
136

FCIC Interview of Gus Harris – May 13, 2010
to that hurdle.

There was a range between an Aa2 and an

Aa rating.
So some deals may be structured -- their
expected loss may be closer to the hurdle, and others
may have a little -- a little distance between the
hurdle and their expected loss.
MR. BONDI:

Okay.

“With that said, several of

the synthetic deals I looked at had somewhat barbelled
portfolios.

80 percent Baa, 20 percent A-minus to Aaa,

which would also account for the lowest
[unintelligible].”
What do you mean there?
MR. HARRIS:

I think what I may have been

talking to was -- “…barbelled which may account for
[unintelligible].”
I’m not sure.
I’m not sure.
MR. BONDI:

Okay.

It’s stated in there, the

first call of action, “Several of the synthetic deals I
looked at.”
Were those deals that you looked at in
response to Mr. Clarkson’s 8:12 a.m. e-mail on July 20th?
MR. HARRIS:

I don’t know if it’s in response

to the e-mail or if I had looked at them previously.
MR. BONDI:

Okay.

Why would you be looking at
137

FCIC Interview of Gus Harris – May 13, 2010
those previously, in July of 2007?
MR. HARRIS:

So, I think the study that we did

in April or May, we would have -- we would have some
statistics on these types of deals.

So I don’t know if

I could look at them for this particular e-mail or I had
looked at, that supported the work that was done for
April and May the 4th.
MR. BONDI:

Number three, “The excess spread

CDOs will also have some excess spread that could be
used to offset the portfolio losses.”
And you describe in the following sentence
that excess spread.

But I want to ask you about the

sentence that begins within “B.”
MR. HARRIS:
MR. BONDI:

Yes.
“The synthetic deals don’t have

any excess spread, and about 20 to 30 percent of
the mezz cash-flow hybrid deals do not have any
excess-spread diversion mechanisms to take advantage of
any excess spread.”
What do you mean there?
MR. HARRIS:

So -- so the synthetic deals --on

that cash-flow deals, the level of subordination on
those deals is tied solo to the principal value of the
collateral.

Whereas a traditional cash-flow deal has

the principal value of the collateral to protect the
138

FCIC Interview of Gus Harris – May 13, 2010
notes, but also has -- it’s generating more interest.
MR. BONDI:

Uh-huh.

MR. HARRIS:
note-holder.

And -- than the cost to the

So there’s excess cash.

MR. BONDI:

So a synthetic deal is more

susceptible to downgrades in the RMBS than a cash deal
because it doesn’t have this excess spread?
MR. HARRIS:

Well, I’m not sure if it’s -- is

it more susceptible to a downgrade.
Is that the question, are they more
susceptible to a -MR. BONDI:

Generally speaking, synthetic

deals, because they don’t have excess spread, are more
susceptible to losses than cash CDO deals which have
excess spreads built into them?
MR. HARRIS:

Yes, I’d say, if they’re -– but

they may have more subordination.

Because there’s less

excess spread, they may have more subordination.
But if an instrument defaults in a synthetic
deal, then there’s no excess spread to make up that
loss.

Whereas in the cash-flow deal, if an instrument

defaults, from generating some competency spread, that
could be plowed back into the deal.
MR. BONDI:
this excess spread?

More vulnerable to losses without
This excess spread protects you
139

FCIC Interview of Gus Harris – May 13, 2010
from losses; is that fair?
MR. HARRIS:

Losses into the tranche?

It protects you from losses.

If there’s no excess spread, you expect more
subordination.
MR. BONDI:
MR. HARRIS:

Okay.
So you have -- so you have two

identical fields, one has more excess spread than the
other, you would expect more subordination in the deal
that has less excess spread
MR. BONDI:

But I thought we just covered, in

the paragraph before, talking about the subordination
paragraph, number two, about the static synthetic deals
are generally structured to be much closer to the rating
hurdles and are, therefore, on the low end, meaning, the
low end on subordination?
MR. HARRIS:

If you’re closer to the hurdle,

you would be more susceptible to a downgrade.
MR. BONDI:

Okay.

So you’re describing

synthetic deals that are more susceptible than
downgrades.

Because they lower subordination?

MR. HARRIS:

No, not necessarily.

Subordination?
Given the rating…
So, yes, I guess they’re closer to the hurdle.
So, relatively, they would have less subordination.
140

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

Okay.

So, generally speaking,

then, the lower subordination and less excess spread,
synthetic deals are more vulnerable to downgrades than
cash CDO deals?

Downgrades on the RMBS, that is?

MR. HARRIS:

To the extent they are structured

closer to the hurdle, yes.

To the extent they’re

structured closer to the hurdle, yes.
MR. BONDI:
right?

And that’s what you’re saying,

They’re generally structured to be closer to the

rating hurdles; is that fair?
MR. ROSS:
MR. BONDI:

[Unintelligible.]
Let the record reflect Mr. Ross is

speaking with Mr. Harris.
MR. HARRIS:

Yes, I don’t know

[unintelligible] point.
So, on the synthetic deals, you also don’t
have a collateral manager to possibly try to take
corrective action, to protect the ratings of the notes.
MR. BONDI:

Making it more vulnerable a

synthetic deal without collateral managers?
MR. HARRIS:

Well, they may or may not.

Some

collateral managers may not create value for the rated
notes.

They may be more junior towards the equity

investors.
MR. BONDI:

Well, without a collateral
141

FCIC Interview of Gus Harris – May 13, 2010
manager, there’s no one there to take corrective action
on a synthetic; is that correct?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

That is correct.
Okay.
Nor to pursue investment

strategies that may be harmful to the investors also.
MR. BONDI:
question here.

So let me go back to my initial

Downgrades on RMBS securities, those

downgrades -- excuse me, a cash CDO is less vulnerable
to downgrades on RMBS securities than a synthetic
deal -- synthetic cash -- synthetic CDO deal, as a
general matter, because of the reasons we talked about.
The less subordination on a synthetic, the lack, or
lesser excess spread on a synthetic and, as you just
pointed out, the fact that a synthetic deal doesn’t have
a collateral manager.
Is that a fair statement?
MR. HARRIS:

As a general statement, yes, I

would say that’s a -– that’s [unintelligible].
MR. BONDI:

And these synthetic deals, were

deals as of July 20th, 2007, that you were still you
trying to get your arms around the deal data; is that
correct?
MR. HARRIS:

For -- just for purposes of

aggregating it.
142

FCIC Interview of Gus Harris – May 13, 2010
The team that was monitoring these deals had
the data -- I mean, I expected that they had; but they
had as a part of the surveillance process, they could
look at these deals.

What we tried to do in our study,

was to aggregate all of it, to take all of that.
So I don’t know how many deals there were, but
to take it all and you have one source
MR. BONDI:

And you’re still trying to get

your arms around those deals as of -- the data -- as of
July 20th, 2007, right?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

The aggregation of the data.
Right.
The rating analysts and the

surveillance team had the data, yes.
MR. BONDI:

Did you, for purposes of your

studying, understanding the impact, were still trying to
get your hands around the data, aggregating this data as
of July 20th, 2007, correct?
MR. HARRIS:
MR. BONDI:

That’s what I commented here.
Do you have any reason to believe

that comment is incorrect?
MR. HARRIS:

I have no reason to believe that

comment is correct.
That study was already out at this time.

was already -- it had already been published.
143

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

Okay.

But you’re speaking as of

July 20th, 2007, correct?
MR. HARRIS:
MR. BONDI:
five-minute break?

Correct.
Okay.

Why don’t we take a

It’s 4:37.

(A break was taken.)
MALE SPEAKER:
MR. BONDI:

The tape recorder’s on.

Mr. Harris, we left off, I think,

talking about the e-mail.

And I don’t have any more

questions on this e-mail that you sent.
But I do want to go back to the earlier
e-mail, Number 38, where you were talking about if 80
percent of the ratings, and you were talking about
non-rated bucket, and it growing.
Was this conversation perhaps surrounding a
discussion concerning notching?
MR. HARRIS:
MR. BONDI:
MR. BUBB:

I don’t believe so.
Okay, fair enough.

Let me follow up just briefly on

this.
In that earlier e-mail, it says, “Taking
others’ ratings at face value could result in inaccurate
ratings.”
Does Moody’s take others’ ratings at face
value?

And during the period, did Moody’s take others’
144

FCIC Interview of Gus Harris – May 13, 2010
ratings at face value?
MR. BONDI:

During the period of around

April 2007, in this time frame?
MR. HARRIS:
MR. BUBB:

I don’t recall.

And so was there a suggestion for a

discussion of moving to taking others’ ratings at face
value?
MR. HARRIS:
MR. BUBB:

Not that I recall.

Do you have any idea why you might

have described the notion of taking others’ ratings at
face value?

If that was Moody’s policy, why would that

be in an e-mail?
MR. HARRIS:

I don’t know why I would have

thought -– I would have done this.

I don’t know.

can’t recall.
MR. BONDI:

When you were a group managing

director overseeing the CDOs, how were you compensated?
What was your compensation?
MR. HARRIS:
deferred equity.

A salary, a bonus, a deferred --

Those are the major elements of

the comp- -- components of the compensation.
MR. BONDI:

In 2006, what was your base

salary?
MR. HARRIS:
MR. BONDI:

I don’t know exactly what it was.
Ballpark range?
145

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

36 CFR 1256.56 - Privacy

would be the ballpark range.
MR. BONDI:
MS. NELLES:
MR. BONDI:

Sharon, do you need us to stop?
No, it’s [unintelligible].
Okay.

And what was your bonus ballpark range?
MR. HARRIS:

For ‘06, which -- so for fiscal

‘06, I believe it was -- I believe it was -- I believe
it was

36 CFR 1256.56 - Privacy

I believe.

MR. BONDI:

And, roughly, how much equity

compensation were you receiving?

Or was that what you

would group in as equity as well?
MR. HARRIS:

I think on the equity -- I don’t

know the specifics, maybe

36 CFR 1256.56 - Privacy

stock

options -- stock-option equivalents.
MR. BONDI:

36 CFR 1256.56 - Privacy

equivalents?

MR. HARRIS:

No, no, like --

MR. BONDI:

[Unintelligible.]

MR. HARRIS:

36 CFR 1256.56 - Privacy

stock options.
MR. BONDI:
MR. HARRIS:
seventy-four.

Uh-huh.

At a certain strike?

Yes, I think the strike price was

But I don’t know the specifics, but a

combination of stock options and equity and stock -- I
think.
146

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

I see.

And tell me, how was your

discretionary cash bonus calculated?

What were the

factors that went into that?
MR. HARRIS:

Was -- it was -- I believe it was

a combination of Moody’s-wide performance, Moody’s
corporation, and then one’s individual performance.
MR. BONDI:

And how was one’s individual

performance with respect to you calculated?
I think you mentioned, you weren’t involved in
the actual ratings performance themselves.
MR. HARRIS:

I had a performance evaluation

from Noel Kirnon, and he made that assessment
MR. BONDI:
Were there benchmarks?

Okay, so -- what were the factors?
Were there goals?

Were there

any objective elements behind that, that you were to
meet?
Revenue expectations, revenue goals, anything
like that?
MR. HARRIS:

Okay.

There -- I mean, I don’t

know off the top of my head, but there were objectives
that were documented.

And -- I assume so.

I’m sure

some of them were objective.
And I don’t recall exactly what they were.
MR. BONDI:

Did you receive, at the beginning

of a year, goals or targets with respect to your
147

FCIC Interview of Gus Harris – May 13, 2010
performance or your group’s performance?
MR. HARRIS:
MR. BONDI:

I generally did, yes.
And what were those targets?

Not

what the amounts were, but what were the areas that you
received targets on?
MR. HARRIS:

So, market outreach and these --

market outreach, reaching out to investors and other
market participants, market coverage.
I believe the -MR. BONDI:
you move on?

What is “market coverage,” before

Is that market share?

MR. HARRIS:

I guess you could refer to it as

market share.
MR. BONDI:
MR. HARRIS:
it’s ‘06, ‘05.

Okay, what else?
I’m not sure about -- whether

But generally, maintaining and building

separate data tools, the data products.
MR. BONDI:
MR. HARRIS:

Uh-huh.
And, again, I’m not sure which

years, but adminis- -- efficiency, administration,
automating -- automating some of the processes that we
follow.

For example, trying to automate the

surveillance process, trying to create other ways to
automate our work-flow efficiencies.
MR. BONDI:

Anything else?
148

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:
most important?

I cannot recall.
Okay.

In your mind, what was the

Was it market share and market

coverage?
MR. HARRIS:

In my mind, they were all

MR. BONDI:

Did you believe that these

important.
were

equally rated then?
MR. HARRIS:
MR. BONDI:

Pretty much, yes.
Equally weighted, I should say,

not rated?
MALE SPEAKER:
MR. HARRIS:

[Unintelligible.]

I think they’re -- those are my

objectives.
MR. BONDI:

Okay.

Did Mr. Kirnon ever express

to you which one of these three might be more important?
MR. HARRIS:

I do not recall Mr. Kirnon

expressing that to me.
MR. BONDI:
MR. HARRIS:

What about anyone else?
I do not recall anyone else

expressing that to me.
MR. BONDI:

Did market share ever slip under

your watch as group managing director?

[Unintelligible]

particularly?
MR. HARRIS:

It varied within a relatively
149

FCIC Interview of Gus Harris – May 13, 2010
narrow range.
MR. BONDI:

It slipped significantly, though?

Or did it decrease in any material respect?
MR. HARRIS:

I’m not sure what the exact

numbers were, but I’d say within, give or take, five
percentage points.

But I don’t know exactly.

MR. BONDI:

I should have said, did it drop by

more than 5 percent in any particular area?
MR. HARRIS:

I’m not sure if it dropped

specifically more than 5 percent.
MR. BONDI:

Okay.

Did market share in any

particular area, while you were group managing director,
at any time period increase by more than 5 percent?
MR. HARRIS:

From quarter to quarter, I don’t

believe it did, from quarter to quarter.

Again, I just

don’t recall.
MR. BONDI:
MR. HARRIS:

What about from year to year?
It’s possible that it may have

been between 85 and 95 percent for some asset classes.
MR. BONDI:

You mean you went from 85 percent

to 95 percent for some asset classes?
MR. HARRIS:

I believe in the synthetics --

again, I’m not sure what our market share was for
synthetics.

But it may have increased a bit on the

asset class -- I think it increased on several asset
150

FCIC Interview of Gus Harris – May 13, 2010
classes.

But I’m not sure if it’s 5 or 10 percent.
MR. BONDI:

What asset classes do you remember

market share increasing?
MR. HARRIS:

I think, generally, from trough

to peak -- I’m not sure if the trough to peak on CLOs
was 5 or 10 percentage points.

It may have been 5 to 10

percentage points for some ABS CDOs.
MR. BONDI:

With RMBS collateral?

MR. HARRIS:
MR. BONDI:

That is correct.
Were you ever commended for

growing the market share on ABS CDOs, with RMBS
collateral?
MR. HARRIS:

I do not.

I don’t recall being

commended on that.
MR. BONDI:

And when you received performance

reviews by Mr. Kirnon, were these in writing?
MR. HARRIS:
MR. BONDI:

I believe they were.
And they were given to you?

MR. HARRIS:
MR. BONDI:

I believe so, yes.
And did anyone else participate in

providing you that review?

Or was it a one-on-one

review with Mr. Kirnon?
MR. HARRIS:

I recollect them being one-to-one

reviews.
MR. BONDI:

Was Mr. Clarkson involved in any
151

FCIC Interview of Gus Harris – May 13, 2010
way in your review?
MR. HARRIS:

I am not aware of him being

involved in that review.
MR. BONDI:

Did he signed the review sheet

[unintelligible]?
MR. HARRIS:

If I reported to him in 2007, he

did.
I’m not sure about the previous years.
MR. BONDI:

Why was market share part of your

MR. HARRIS:

Well, I had multiple objectives.

bonus?

And market coverage is important for simple reasons.
You know, we are in the business of providing opinions,
and we’d like for our opinions to be of value to the
marketplace.

And to the extent that the marketplace has

not seen value in our opinions, I come to understand
why.
Another reason would be that multi-coverage
makes us -- it will help us improve our services to the
marketplace.

It allows us to speak more intelligently

with market participants, because we have a broader view
of the marketplace.
It allows us to provide better research to the
marketplace.

It also allows us to collect more data and

consider that data as part of our ongoing process, to
152

FCIC Interview of Gus Harris – May 13, 2010
try to improve our ratings methodology.
MR. BONDI:

And did you communicate

market-share information to the managing directors who
worked under you when you were group managing director?
MR. HARRIS:

I think that the -- I think that

the managing directors had access to that information.
MR. BONDI:

Had access from where?

Sent to

them?
MR. HARRIS:

Yes.

I think they received it

from -- we had an administrator on our team who, one of
her many duties -- she had multiple duties, one of which
was to collect market information and distribute it to
the management team.
MR. BONDI:

How often was market information

distributed to the management team?
MR. HARRIS:

I don’t recall how frequently it

was, if it was quarterly or monthly.
MR. BONDI:

I cannot recall.

What was Mr. Clarkson’s view on

persons who lost deals to competitors?
MR. HARRIS:

Well, we have many examples of

that.
I think kids -- I believe that understanding
why the market isn’t valuing our opinion, is what I
think he wanted to understand more.

Why isn’t the

market valuing our opinion?
153

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

Let me ask you this:

Did

Mr. Clarkson ever say or did you ever hear about
Mr. Clarkson saying, in form or substance -- maybe not
exactly what I’m saying but in substance -- if someone
was going to lose a deal, they’d better be able to
explain why they lost the deal or they would lose their
job?
MR. HARRIS:
MR. BONDI:

I do not him saying that.
Was that something that was the

general feeling about Mr. Clarkson?

That if you lost

market share -- or excuse me, lost a deal and weren’t
able to explain why, your job might be in jeopardy?
MR. HARRIS:

If we can’t explain why we are --

if we cannot explain why the market is not valuing our
opinion, that is our job.
So -- I’m sorry, is the question…
MR. BONDI:

Was -- if someone lost a deal and

wasn’t able to explain why, that person’s job would be
in jeopardy in the eyes of Mr. Clarkson; is that fair?
MR. HARRIS:

I don’t know.

I don’t know if

that’s fair.
MR. BONDI:

What was the -- let’s take

away “in the eyes of Mr. Clarkson.”
If someone lost a deal to a competitor and
couldn’t explain why, is that person’s job potentially
154

FCIC Interview of Gus Harris – May 13, 2010
in jeopardy?
MR. HARRIS:

Um, I think if we could not

understand and explain why -- just couldn’t understand
it, I believe that -- [unintelligible] is going to be in
jeopardy, yes.

If you couldn’t explain it.

MR. BONDI:

Did you ever talk to any of the

managing directors who reported to you when you were
group managing director about any particular deals that
they lost?
MR. HARRIS:

Any particular deals?

We had constant dialogue about the deals that
were being done without us.
MR. BONDI:

And as a group managing director,

was it a goal of yours to ensure that the persons
underneath you didn’t lose any deals to your
competitors?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

No.
It wasn’t a goal of yours?
No.

A goal of mine -- of ours

was to understand why; and if it’s our standards and our
methodology, then there’s nothing to be done.
But there could be reasons that we could
address.

Cost could be an example.

There’s other

ambients that we could consider, but we had to
understand why we were not on the deals.
155

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

How do you believe market share

was communicated to the managing directors?
MR. HARRIS:

The managing directors are closer

to the marketplace than the senior managing director or
group managing director.

So they may have a better

understanding of what the issues are behind the
marketplace not valuing our opinions.
MR. BONDI:

When you say “the market not

valuing your opinions,” who pays for your ratings and
your opinions?
MR. HARRIS:

The actual payment is made by the

vehicle -- I think the vehicle that raises the money
from the investors.
Part of the proceeds from that vehicle are
paid to the rating agency.

That’s how I believe it’s

done.
MR. BONDI:

You’ll have to forgive me.

I’m

not sure about vehicles making payments on their own.
Who is behind the payment, though?

Is it the

investment bankers?
MR. HARRIS:
vehicles.

Well, the bankers create the

And I don’t know -MR. BONDI:

And the bankers pick the rating

agencies, correct?
MR. HARRIS:

Or the investors.

I would argue
156

FCIC Interview of Gus Harris – May 13, 2010
the investors have a say also.
MR. BONDI:

So is it the investors that come

to Moody’s and say, “We want you to rate this deal”?
MR. HARRIS:

The investors would request for

us to be on deals, yes.
MR. BONDI:
Moody’s?

Who is making contact with

Is it the investors?

Has an investor, with

respect to a CDO, ever called Moody’s or anyone working
there with you, and say, “We want you to rate this CDO”?
MR. HARRIS:

Have they called us directly?

don’t recall that.
MR. BONDI:
MR. HARRIS:

Correct.
But if they would request to

someone structuring the deal, that they want these
rating agencies or this rating agency on a deal, my
understanding is that those happen.
MR. BONDI:
MR. HARRIS:
MR. BONDI:
call, though?

It does happen or it did happen?
It did happen.
Okay.

The banker?

MR. HARRIS:

And who makes the phone
The investment banker?

Yes, the investment banker would

make a call to introduce the deal, to put the deal in
our queue.
MR. BONDI:

And how -- what is your basis,

though, for saying that investors are telling the
157

FCIC Interview of Gus Harris – May 13, 2010
bankers to call Moody’s in particular?

What’s your

basis for that?
MR. HARRIS:

Well, we -- part of our job is to

reach out to the marketplace and to describe our
methodology; to describe how we approach our analysis,
to describe some of the qualitative features that we
talked about before, and try to start to make the case
for the investors that this is a very sound methodology,
and it’s one that you should consider when you’re
investing in your CDOs.
MR. BONDI:

And so you would have ongoing

dialogue with investors on CDOs?
MR. HARRIS:

Yes.

MR. BONDI:

Okay.

these ongoing dialogues?

And how would you have

By phone?

In person?

Did you

have meetings with them?
MR. HARRIS:

A mix of all the -- a lot of

face-to-face meetings.

We’d go out and meet with

investors face-to-face.
MR. BONDI:

You’re meeting directly with

investors?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
MR. BONDI:

Yes.
In CDOs?
That is correct.
Face-to-face?
158

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
MR. BONDI:

That is correct.
Okay.

Concerning your ratings?

That is correct.
And give me the time period.

This

is while you were managing director?
MR. HARRIS:

And a team managing director.

As a manager, that’s my –- that’s one of my
objectives, is to go out and speak to the marketplace,
including investors.
MR. BONDI:

Uh-huh.

And what were you telling

them about your rating, these investors?

Your ratings?

Were you talking about the ratings process as well?
MR. HARRIS:
MR. BONDI:

Yes.
Were you talking about

methodologies?
MR. HARRIS:

It was -- it was generally -- it

was a combination of their agenda and things that we may
have wanted to talk to them about.
But investors generally would -- they would be
interested in hearing the most recent thinking from us,
how [unintelligible] operating.

Just general questions

about Moody’s and about derivatives and our
methodologies.
And then we may be reaching out to them to
share some good elements that we think would be in the
159

FCIC Interview of Gus Harris – May 13, 2010
interest to them.
MR. BONDI:

And were these investors relying

on your ratings?
MR. HARRIS:

These investors would do their

analysis; and as part of their analysis, the opinions of
the agencies, I think, would have been -- I think it
would have been considered.
MR. BONDI:

So the investors relied in part on

your ratings?
MR. HARRIS:

Or they may have been interested

in our methodologies so they create –- they could create
their own internal analytics.
So it would be a combination of understanding
what we’re doing, to actually find their analytic -their analytics –- review their –- in their investments.
MR. BONDI:

Did they value your ratings?

MR. HARRIS:

That’s -– that’s a question for

MR. BONDI:

When you were talking to them, did

them.

they tell you, “We value what you’re doing”?

Did they

say, “We look to your ratings, we value your ratings”?
Is that what investors were telling you?
MR. HARRIS:

I don’t know specifically if they

were saying that.
MR. BONDI:

What were they saying to you about
160

FCIC Interview of Gus Harris – May 13, 2010
your ratings and the importance to them?
MR. HARRIS:
us.

So, explain the methodology to

How do you look at the world?

access your tools?

How do you – can we

A lot of investors wanted to have

access to the tools that we use.

And they had asked

about the rating process.
MR. BONDI:

And as you sit here today, can you

just tell me some of the names of the investors that you
met with?

You personally?
MR. HARRIS:

trying to think here.
MR. BONDI:
MR. HARRIS:
MR. BONDI:

We met with -- let’s see, I’m
TIAA-CREF.
Okay.
I believe we’ve met -Who did you meet with there?

you remember?
MR. HARRIS:
MR. BONDI:

I do not recall.
When did you meet -– when do you

remember meeting with TIAA-CREF?
MR. HARRIS:

I don’t know -- I do not know

exactly when I met with the investors.
MR. BONDI:

Who else that you personally were

involved in meetings with?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

I think I met with Cheney.
Cheney Finance?
Uh-huh.
161

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:

Who do you recall meeting with at

Cheney Finance?
MR. HARRIS:

I do not recall a specific

person.
MR. BONDI:
MR. HARRIS:
MR. BONDI:

Okay.

Who else?

Allstate.
Allstate?

Who do you remember speaking to at Allstate?
MR. HARRIS:
MR. BONDI:

I don’t -- I don’t recall.
Who else?

MR. HARRIS:

ZAIS.

ZAIS, Z-A-I-S.

MR. BONDI:

Uh-huh.

Who do you remember

meeting with there?
MR. HARRIS:
MR. BONDI:

Jerry Hong.
Jerry Hong?

What other investors you personally were
involved in meetings with?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

I recall Babson, Mass Mutual.
Who at Babson, who at Mass -I think he would have been Drew

Dickey and Matt Natcharian.
MR. BONDI:
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

Okay.

So the second name was who?

Matt Natcharian.
Can you spell the last name?
I don’t know exactly how it’s
162

FCIC Interview of Gus Harris – May 13, 2010
spelled.

N-A -- I don’t know.
MR. BONDI:

Drew Dickey was at Babson?

Matt -MR. HARRIS:
MR. BONDI:

“N,” Natcharian.
Natcharian?

That the slowest [unintelligible], I ever
heard you speak.
MR. HARRIS:
MR. BONDI:

That’s for [unintelligible].
What other investors do you

remember talking to?
MR. HARRIS:

I think I met with MetLife in the

City of New York.
MR. BONDI:

Who do you remember meeting with

there?
MR. HARRIS:
MR. BONDI:

I don’t recall any names.
Who else do you remember meeting

with?
MR. HARRIS:
MR. BONDI:

With AIG, Sonya Hamstra.
Who else?

MR. HARRIS:

I’m trying to think of the name.

It escapes me.
Gordon Knott.
MR. BUBB:

Okay.

MR. HARRIS:
MR. BUBB:

Out of England, right?

Yes.

Who do you remember meeting with
163

FCIC Interview of Gus Harris – May 13, 2010
there?
MR. HARRIS:
MR. BUBB:

I don’t recall the names.

Anyone else?

MR. HARRIS:

[Unintelligible], a Japanese

name, [unintelligible]].
MR. BUBB:

Who there?

MR. HARRIS:
MR. BUBB:

I don’t recall the names.

Did you speak to any German banks

or German investors, generally?
MR. HARRIS:

There were -- there were -- yes,

there were some trips to Germany.
MR. BUBB:

Who did you speak with?

MR. HARRIS:

And, actually, I think -- I

believe that the context of some of these visits also
was the tools -- the rating tools, the data may not have
been specifically to talk about the ratings.

There

could have been the ratings process, the ratings
approach and methodologies, there also could have been
the tools and data.
So in Germany, for example, I do recall having
a particular meeting on that, on the tools and data with
IKB.
MR. BONDI:

IKB in the news these days?

Who do you remember talking to at IKB?
MR. HARRIS:

I do not recall the team there.
164

FCIC Interview of Gus Harris – May 13, 2010
It was a meeting for -MR. BONDI:

Who went with you from Moody’s?

Brian Clarkson?
MR. HARRIS:
MR. BONDI:

Yes.
Noel Kirnon?

MR. HARRIS:
MR. BONDI:

I don’t think so.
Do you remember meeting with any

investors with Brian Clarkson?
MR. HARRIS:

Investors?

I do not recall meeting with investors with
Mr. Clarkson.
MR. BONDI:

How do investors use your tools?

So, for example, IKB, what was their interest in your
tools?
MR. HARRIS:

So, they may want to include the

data in their own internal analytics engines.
So, I don’t know if it was IKB.

It may have

been IKB.
But in Germany, some of the organizations were
trying to build their internal analytics, and they
needed the data.
MR. BUBB:

This is for their own analysis of

investments in making their decisions on on regular
bonds -MR. HARRIS:

They were testing it, that is
165

FCIC Interview of Gus Harris – May 13, 2010
correct.
MR. BONDI:

So the underlying basis for their

own analysis was your models and your tools and data?
MR. HARRIS:

Or they could create their own.

I’m not sure that these are tools for the
ultimate decision.

They may have been an input in

creating their own models, but I’m not sure that they -MR. BONDI:
MR. HARRIS:

[Unintelligible] -- sorry?
I don’t -- I’m not sure that they

used our tools for their ultimate decision.
MR. BONDI:

Did you have any meetings with

investors about the ratings on deals that investors were
thinking about investing in?
MR. HARRIS:

I do not -- as a manager, I do

not recall having those discussions.
MR. BONDI:
MR. HARRIS:

What about -For a deal during the

underwriting period -MR. BONDI:
MR. HARRIS:

Sure.
-- I do not recall having those

discussions.
MR. BONDI:

Okay, what about, it sounds like

you recall some sort of discussions with investors about
potential deals, perhaps after the underwriting, while
the deal was being marketed, do you recall any of that?
166

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I don’t remember any specifics.

But as a rating analyst, I do remember sometime an
investor calling and asking how we analyzed a deal.
MR. BONDI:

And an investor calling before

they purchased the investment?
MR. HARRIS:
committed or not.

I’m not sure if they had already

I don’t know.

MR. BONDI:

But if they were calling about a

particular security that they were interested in
investing in or may have just invested in; is that
what -MR. HARRIS:

When they had acquired it, they

may have finished their work, I’m not sure -- yes, there
was some interest for them to inquire about that deal.
MR. BONDI:

A specific deal, a specific

security, and a specific security that Moody’s was
rating?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

That Moody’s was rating.
Was rating?
So afterwards -- yes, after the

deal closes, we also had discussions with clients on
particular deals.
MR. BONDI:
though?

What do you mean, “was rating,”

Do you mean, during the middle of the rating

process?
167

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:

Yes.
So you had specific conversations

with investors during the middle of the rating process?
MR. HARRIS:
MR. BONDI:

Yes.
Okay, what investors do you

remember having specific conversations -MR. HARRIS:
MR. BONDI:

When I was an analyst?
Yes.

MR. HARRIS:

That’s more than ten years ago.

I do not recall the specifics.
MR. BONDI:

So it sounds as if Moody’s, you,

and others at Moody’s had quite a few contacts with
investors directly?
MR. HARRIS:
MR. BUBB:

That was our job, yes.

I could be [unintelligible]], I

could be [unintelligible]?
MR. HARRIS:
MR. BUBB:

What year?

MR. HARRIS:
MR. BUBB:

I’m not sure.

I don’t know.

Did you discuss with IKB any of

their investments with securities underwritten by
Goldman Sachs?
MR. HARRIS:

I do not recall that.

I do not

recall if we did.
MR. BONDI:

You had a conversation with AIG?
168

FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

Yes.

MR. BONDI:

What do you recall from that

conversation?
MR. HARRIS:

AIG -- I think the discussion

that I recall with Sonia is similar to the IKB
discussion, the data that they may use to monitor their
deals.
MR. BONDI:

And so it was about, in general,

the data as opposed to any specific deal or transaction
or any specific banks?
MR. HARRIS:

I do not believe that the -- I do

not recall the AIG discussion being specific to any
deal.
MR. BONDI:

Did you get the impression that

these investors thought your ratings were important to
them from what they said to you?
MR. HARRIS:
their analysis, yes.

The ratings were a component to
It’s something they considered in

their ultimate decision, but not [unintelligible].
MR. BONDI:

What is a “placeholder asset” in a

deal that Moody’s is rating?
Are you familiar with the term “placeholder
asset”?
MR. HARRIS:
means.

I am not sure exactly what that

I know the -169

FCIC Interview of Gus Harris – May 13, 2010
MR. BONDI:
being used:

“Placeholder asset”?

MR. HARRIS:
exact.

Have you ever heard that term

I’m not sure.

I don’t recall

I do not recall.
MR. BONDI:

Okay.

Sharon, do you have any idea what a
“placeholder asset” might be?
MS. NELLES:
MR. BONDI:
MS. NELLES:
MR. BONDI:

[Unintelligible.]
I’m sorry?
I’m actually [unintelligible].
Do you have any -- I mean, if

someone said, “Hey, this CDO, we’re using placeholder
assets here,” would you have a sense of what they meant?
I mean, do you have any sense of what a placeholder
asset is?
I totally don’t want you to guess; but at the
same time, if you have a basis for understanding what
a “placeholder asset” is, based on your experience, if
you have any sort of basis, if you’ve heard that term
being used, what do you understand or believe to be
meant by “placeholder asset”?
MR. HARRIS:

It could be an instrument -- it

could be a portfolio where the asset has not been
identified -MR. BONDI:

Okay.
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FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:
MR. BONDI:

-- in a generic line item.
Okay.

And were deals ever rated

where, as using that definition, you know, “Placeholder
asset” -- because I think that’s the one that’s my
understanding of a placeholder asset -- were deals ever
rated where placeholder assets were used and then later
substituted out for actual assets?
MR. HARRIS:
MR. BONDI:

I would expect, yes.
And does this go back to the same

[unintelligible] rating, public ratings sort of thing,
or is this a different situation?
MR. HARRIS:

It’s the issue of when you look

at a portfolio, individual names may not be as relevant
as the characteristics of the portfolio:

What’s the

rating, what’s the maturity, what’s the coupon.

That’s

more important than the credit being the -- I don’t
know, AK Steel loan.
MR. BONDI:

And do you remember a deal that

Credit Suisse did using a placeholder asset which ended
up having unwound later, after it was rated?
MR. HARRIS:

I do not recall a placeholder

deal that was unwound.
MR. BONDI:

Okay.

Do you ever remember a

Credit Suisse deal that was unwound later, after it had
already been rated?
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FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I do not -- I do not recall a

Credit Suisse deal being unwound.
MR. BONDI:
being unwound?

Okay.

What about a Merrill deal

And forgive me, if I had more

information to share, I would.
A Merrill Lynch deal that was unwound after it
had already been rated?
MR. HARRIS:

I don’t recall any deal being

unwound shortly after it was rated.
MR. BONDI:

Okay.

Did you ever fire anyone

when you were group managing director?
MR. HARRIS:

I may have terminated one or two

senior associates, entry-level people -- and, I’m sorry,
and one -- and one -- I believe one VP.
I don’t know if I was a group managing
director or a team managing director at that time.
MR. BONDI:

All right.

And who was the group

VP?
36 CFR 1256.56 - Privacy

MR. HARRIS:
MR. BONDI:
MR. HARRIS:

[unintelligible].
Why was she terminated?
I would say -- we did not think

she was a very good analyst because she was having a
difficult time not withstanding the structures and
maintaining the integrity of the ratings.
MR. BONDI:

Was she on the quantitative side
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FCIC Interview of Gus Harris – May 13, 2010
or the legal side?
MR. HARRIS:
MR. BONDI:

Quantitative.
And was it based on complaints by

any issuers of banks?
MR. HARRIS:
MR. BONDI:

I do not believe so.
Okay.

And the two junior people,

why were they terminated?
MR. HARRIS:

I believe we terminated them

early on, when they first joined us.

They were not

getting up to speed with learning -- learning our tools
and our platform.

They were very slow learners.

MR. BONDI:

Do you remember any analysts going

to work for investment banks?
MR. HARRIS:

Yes.

MR. BONDI:

Okay.

Can you tell me all the

analysts that you remember, sitting here today, who left
Moody’s to go work for an investment bank?
MR. HARRIS:

So, I believe we probably had

Deepali Advani went to an investment bank –
I believe that -MR. MCWILLIAMS:

I missed that name.

Can you

repeat that name, please.
MR. HARRIS:

Sure.

Deepali, D-E-E-P-A-L-I,

the last name Advani, A-D-V-A-N-I.
MR. BONDI:

Deepali went to work for Lehman,
173

FCIC Interview of Gus Harris – May 13, 2010
right?
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

I believe so.
Anyone else?
I believe Miles Bae, the last

name is B-A-E.
MR. BONDI:
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
MR. BONDI:
MR. HARRIS:
or to a French bank.

Where did he go?
I think he went to HSBC, I think.
Okay.

Who else?

I believe, Jack Tolk, T-O-L-K.
Where did he go?
I don’t know if he went to HSBC
I do not recall.

But I think he

went to a bank.
MR. BONDI:

Anyone else?

Who else?
MR. HARRIS:
MR. BONDI:

I don’t recall anyone else.
Okay.

Anyone higher than an

analyst that you remember leaving to go work for
investment banks?

MDs or others?

MR. HARRIS:

Oh, I believe that I think Gerard

O’Connor.
MR. BONDI:
MR. HARRIS:

When did he [unintelligible]?
This was, I think, ten years ago.

Is the time frame relevant or -MR. BONDI:

Well, let’s stick with just this
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FCIC Interview of Gus Harris – May 13, 2010
decade, the two thousands.
MR. HARRIS:

I don’t even know technically if

he’d be in the two thousands, but it was some time ago.
MR. BONDI:
MR. HARRIS:

All right.
I don’t know where he went. I

thought he went to a bank.
[Unintelligible] Kolchinsky.
MR. BONDI:
MR. HARRIS:
MR. BONDI:
MR. HARRIS:

Uh-huh.

Went to Lehman?

That is correct.
Okay.

Anyone else?

Helen Remeza.

She went to -- I

believe C.S. First Boston.
MR. MCWILLIAMS:

How do you spell the last

name there, please?
MR. HARRIS:

R-E-M-E-Z-A.

MR. MCWILLIAMS:

Okay, and the first name was

Helen?
MR. HARRIS:

That is correct.

MR. MCWILLIAMS:
MR. BONDI:
MR. HARRIS:
decade.

Okay, thank you.

Okay, anyone else?
[Unintelligible] you said this

I don’t know –- unsure if [unintelligible] was

a long time, started 1999 or 2000, but -MR. BONDI:
MR. HARRIS:

Right around [unintelligible]?
I think -- I believe she went to
175

FCIC Interview of Gus Harris – May 13, 2010
JPMorgan.

And she joined -- I believe, if I recall

correctly, she joined [unintelligible] Murphy back in
the late nineties.
MR. BONDI:
MR. HARRIS:
MR. BONDI:

Okay.

Left and went to a bank?
Investment.

MR. MCWILLIAMS:
that.

Anyone else?

I’m sorry, I didn’t hear

What was that name?
MR. BONDI:

There was no name.

MR. MCWILLIAMS:
MR. BONDI:

No name, huh?

He’s thinking.

I tell you what:

Sorry.

Why don’t we, in the

interest of time, could you do me a favor and think
about who else you remember, and just tell one of your
counsel, and maybe they could get it to us?
I’ll stipulate, if you promise just to think
about who else left to go to investment banks -- you
obviously were at Moody’s for a long time, and I know
there’s -- you’re covering a lot of years in your mind.
But if you can think of any other analyst or MDs who
left to go work for investment banks, I’d appreciate
those names.
MS. NELLES:

Mr. Harris, as you sit here,

right now, is there anybody else –
MR. HARRIS:

No.
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FCIC Interview of Gus Harris – May 13, 2010
MS. NELLES:

-- you can think of?

MR. HARRIS:

I cannot.

MR. BONDI:

Okay, all right.

And if you think

of anyone else, could you let one of your attorneys
know?
MR. HARRIS:
MR. BUBB:

I will

Okay, great.

I want to go back briefly to this study that
you were involved with [unintelligible] the downturn in
the mortgage market for CDOs.
You said earlier today that Brian Clarkson
asked you to study those.
Could you tell us, what was the goal of the
study?
MR. HARRIS:

To -- I think it’s -- I think

it’s in the study, the paragraph, provide to the
marketplace some transparency in terms of the potential
ratings performance of CDO notes, with changes in the
ratings of the underlying assets.
MR. BUBB:
study?

And what was the conclusion of that

Can you describe it in broad terms?
MR. HARRIS:

I think it was more of a factual

study, where we put the results -- we found out the -we made the results available for the marketplace.
MR. BUBB:

And, broadly speaking, what were
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FCIC Interview of Gus Harris – May 13, 2010
the results?
MR. HARRIS:
MR. BUBB:

I don’t recall exactly what the…

Did you conclude that CDOs make up

or were substantial impairments and downgrades going
forward?
MR. HARRIS:

I do not believe that was our

conclusion, but I’m not -- again, I don’t recall what
the conclusions were.
MR. BONDI:

As the mortgage market was

deteriorating in 2006-2007, housing prices were going
down, delinquencies were going up, downgrades started -of RMBS started in earnest in July of 2007.
Were any changes made to the methodology of
rating CDOs with RMBS as collateral?
MR. HARRIS:
the ratings team.

I’m not aware.

I was not part of

I do not know.

MR. BONDI:

Bruce, do you have anything?

MR. MCWILLIAMS:

Yes, a few questions.

Are you done?
MR. BONDI:

Yes.

MR. MCWILLIAMS:

I missed a little bit.

When was Analytics bought?
MR. HARRIS:

Wall Street Analytics was

acquired in December of ‘06.
MR. MCWILLIAMS:

December ’06?
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FCIC Interview of Gus Harris – May 13, 2010
And so then it wasn’t until ‘09 that you were
able to get loan-level data?

Or that you had -- I mean,

the data was all filled out and you could use the
technology?
MR. HARRIS:

It’s to get it –- to get the

loan-level data loaded into our platform and then
updated on a consistent basis going forward.
It wasn’t just getting it in; you had to get
it in -MR. MCWILLIAMS:
MR. HARRIS:

Okay.

-- and then you had to have a

process in place updated every month going forward.
MR. MCWILLIAMS:

So that meant that for the

entire decade, Moody’s had no access to loan-level data?
MR. HARRIS:

I’m not aware if the -- I’m not

aware of the practices of the RMBS team.

I don’t know

if the RMBS team had access to loan-level data.
MR. MCWILLIAMS:

But your area, the CDO area,

had no loan-level data?
MR. HARRIS:
loan-level data.

We did not have access to ongoing

That’s my recollection.

MR. MCWILLIAMS:

Okay.

What is the maximum

bonus?
You said in two thousand- -- let’s say in
2005, were you aware of that?
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FCIC Interview of Gus Harris – May 13, 2010
MR. HARRIS:

I’m sorry?

MR. MCWILLIAMS:

Well, there’s a term

called “maximum bonus” that’s associated with Moody’s.
I’m wondering if you knew what that was or if
that was related to your staff or -- and that was
related to something about a number of deals that people
worked on.

Do you know about that?
MR. HARRIS:

No, I’m not aware of that.

I’m

not aware of it.
MR. MCWILLIAMS:

So for ‘05-‘06 -- in ‘05 and

‘06, there’s no such thing as “maximum bonus”?
MR. HARRIS:

I’m not aware of what “maximum

bonus” may mean.
MR. MCWILLIAMS:

Okay, and so there’s no

calculation for the number of deals that an analyst
would work on?
MR. HARRIS:

I’m sorry, there was no --

MR. MCWILLIAMS:

Well, there’s no calculation

about year-end bonus based on the number of deals that a
person worked on, or their volume or some metric?
MR. HARRIS:

No, there was not.

Not to my

knowledge.
MR. MCWILLIAMS:
Kirnon?

What kind of boss was Noel

Was he a real hands-on guy or did he direct you

to have meetings and then he would give you direction,
180

FCIC Interview of Gus Harris – May 13, 2010
and then you would go work with your staff?
MR. HARRIS:

He was a combination of both.

He would be hands-on in some cases and he would be
hands-off in others.

It’s hard for me to generalize

what his style was.
MR. MCWILLIAMS:

I’m looking at the -- in the

derivatives department in ‘05, I see you reported
directly to Noel Kirnon, and then Gary Witt and Yuri
Yoshizawa -- I can’t pronounce her surname -- and Bill
May -- the three of them reported to you, and then you
reported directly to Noel Kirnon.
So would he go to Gary Witt directly and Yuri,
or would he come to you only?
MR. HARRIS:

I recall him joining us in some

of our meetings, so I could keep it a combination of
both.
MR. MCWILLIAMS:

Okay.

And what -- I think in

‘07 -- I think I forget, August ’07 or maybe October
’07, you stopped being involved with derivatives and
went to the New Products Group; is that correct?
MR. HARRIS:

So in December of ‘06, I was

involved solely with CLOs.

That was my responsibility.

And then in, I believe, August of ‘07 I had no more
involvement with the derivatives team.
MR. MCWILLIAMS:

And so that was the New
181

FCIC Interview of Gus Harris – May 13, 2010
Products Group?
MR. HARRIS:

The New Products Group had been

around at that point for a while.

But, yes, at that

point I had –- I would spend a hundred percent of my
time on the New Products and the Global Managed Funds
team.
MR. MCWILLIAMS:

So that was in the last

quarter of ‘07?
MR. HARRIS:

New Products and Global Managed

Funds were my responsibility from the beginning of ‘05.
MR. MCWILLIAMS:

Oh, okay.

I’m sorry, I

didn’t get that.
MR. HARRIS:

So from the beginning of ‘05,

when I was promoted to group managing director, my
responsibilities were Global Managed Funds, U.S.
Derivatives, and the New Products Group that was in its
early stages then, but it was the New Products Group.
MR. MCWILLIAMS:

So then by -- but then Yuri

Yoshizawa, she took over the Derivatives piece, and then
you just had the other two pieces; is that right?
MR. HARRIS:

Yes, so in late ‘06, Yuri took --

Yuri Yoshizawa took over all of the New York derivatives
business with the exception of U.S. CLOs.

And then in,

I believe, July of ‘07 or August of ‘07, she took over
the U.S. CLO group was also assigned to her.
182

FCIC Interview of Gus Harris – May 13, 2010
MR. MCWILLIAMS:

Okay.

I think those are all my questions.
MR. BONDI:

Mr. -- I’m sorry, Mr. Harris, our

interview process is confidential, so we ask that you
don’t discuss anything with anyone else outside of your
lawyers.
And before we conclude, though, do you have
anything else that you think we ought to know that would
help understand the ratings process?

Anything that you

think we ought to look at or understand, or any
particular document that you recommend that we read?
I know that’s a broad question, but I just
want to make sure that there’s nothing you think we
ought to look at and make sure that we’re complete in
particular?
MR. HARRIS:

Well, I think the topics that you

addressed or issues -MR. BONDI:

I’m sorry, that was not a fair

question, and I apologize.

That was a very broad, and

I didn’t mean to ask it so broad.
Let me ask you this way -- I’ll ask it this
way:

Was there any topic that we didn’t talk about

today, that you were surprised that we didn’t talk
about?
Is there anything you were expecting that we
183

FCIC Interview of Gus Harris – May 13, 2010
would talk about, that we didn’t talk about?
MR. HARRIS:
MR. BONDI:

No, there was not.
Let me ask you one more broad

question, if I may.
What do you think the biggest flaw was in the
rating of RMBS CDOs, if any such flaw, during the period
of [unintelligible] -MR. HARRIS:

I know -- I do not know -- I’m

not an expert in RMBS.
in RMBS.

I do not -- I have no background

I did not rate any RMBS deals.
MR. BONDI:

I’m talking about CDOs containing

RMBS, to be more clear.
MR. HARRIS:

Well, the performance of those

deals is tied directly to the underlying mortgage
market, so it’s hard for me to comment on that.
I mean, I could make general statements about
what I’ve read about the performance of the underlying
assets, the origination process; and a lot has been
written about that.
Well, that would be tough, too.

CDO.

So a general comment would be, on the
underlying performance, the loans, what is it about that
process that could have resulted in losses that I think
would have been more in line with what was being
predicted by many market participants at the time of
184

FCIC Interview of Gus Harris – May 13, 2010
origination.
MR. BONDI:
Thank you.

I appreciate it.

Thank you.

We do appreciate it.
(End of interview with Gus Harris)
--o0o--

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Full text of Financial Crisis Inquiry Commission : Documents Relating to the Financial Crisis of 2007-2009 : Transcript of Interview With Gus Harris, May 13, 2010

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