The emails were sent to S&P's executives and Cian Chandler did not see them. Photo: Reuters
A LONDON analyst employed by the credit rating agency Standard & Poor's told the Federal Court yesterday that emails written by his boss in 2006 were ''incorrect'' and ''extraordinary''.
Cian Chandler was the primary analyst responsible for advising a Standard & Poor's committee that assigned a AAA rating to a new structured finance product known as a constant proportion debt obligation, or CPDO.
He was asked yesterday about two emails written by the European head of credit derivatives for Standard & Poor's, Perry Inglis, about the financial modelling used to rate CPDOs.
The emails were sent to other Standard & Poor's executives and Mr Chandler did not see them at the time.
In the first email Mr Inglis wrote: ''We can't be very precise about the initial spread in relation to rating because the rating was never really about the model anyway.''
The second email said: ''I know how those ratings came about and they had nothing to do with the model.''
Standard & Poor's is not calling Mr Inglis to give evidence in the case, brought by 13 local councils that lost $16 million, or 93 per cent of the capital they invested in a CPDO marketed as Rembrandt notes.
The councils are suing the company that sold them the notes, Local Government Financial Services Pty Ltd, the investment bank that created them, ABN AMRO (now part of Royal Bank of Scotland) and Standard & Poor's.
Noel Hutley, SC, for 12 of the councils, asked whether Mr Inglis had told Mr Chandler around the time he sent the first email that he thought the model was deficient.
''No he didn't, but I think what I read from that is no one model-run gives you the rating, but the idea that it was never about the model is incorrect because that's a vital tool in arriving at it,'' Mr Chandler said.
And he said he was surprised by the second email saying the CPDO ratings had nothing to do with the model.
''It's an extraordinary proposition to you, correct?'' Mr Hutley asked.
''Yes,'' Mr Chandler replied.
Mr Chandler also denied he had allowed to be published a research report on the CPDO that was calculated to encourage potential purchasers to be ''relaxed'' about the product.
''That's not my job and that's not the point of the report,'' he said.
Mr Hutley asked about a sentence under the heading ''Strengths, concerns and mitigating factors'' which said: ''Spread widening, attended by no corresponding defaults, is beneficial to the structure.''
Mr Chandler said the statement was ''partially right'' and ''you could clarify it by saying 'not always' ''.
''In that one sentence it's not outlined, but if you read it [the research report] from start to finish you will find out spreads can be detrimental as well as beneficial to the structure,'' he said.
