The job of assessing risk

Much of the commentary about the cause of the recent market turbulence has missed several critical facts. For example, our recent downgrades affected approximately 1% of the $565.3 billion in first-lien subprime residential mortgage-backed securities (RMBS) that Standard & PoorÆs rated between the fourth quarter of 2005 and the end of 2006. This represents only a small portion of the mortgage-backed securities market, which in turn represents a very small part of the worldÆs credit markets. Additionally, our recent downgrades included no AAA-rated first-lien subprime RMBS, and 85% of the downgrades were rated BBB and below. In other words, the overwhelming majority of our ratings actions have been directed at the weakest-quality subprime securities. Equally important, only three out of more than 14,000 subprime first mortgage securities rated by Standard & PoorÆs have defaulted since July 1.

The fundamental service provided by a rating agency such as S&P is to issue an independent opinion on the creditworthiness of securities, which speaks to the likelihood that investors will receive payments of interest and principal on time. Our ratings are based on the facts available to us at the time these opinions are made.

Ratings are designed to be stable; unlike market prices, they do not fluctuate on the basis of market sentiment. But they can and do change û either as a result of fundamental adjustments to the risk profile of a bond or the emergence of new information. Importantly, ratings are not recommendations of whether to buy, sell or hold a particular security; they simply provide a tool for investors to assess risk and differentiate credit quality.

Rating agencies often are criticized for being paid by the issuers of the bonds we rate. Investors value this approach because it enables us to make our ratings widely available for free û providing access to information that helps them make informed investment decisions. Today, investors and others can access, evaluate, and even criticize the hundreds of thousands of ratings that we make publicly available each year. While rating agencies that use a subscription-only model do not typically make their ratings public, our approach promotes transparency of our criteria and our opinions.

Furthermore, this approach does not affect how we assign our ratings. Our ratings criteria are publicly available, non-negotiable and consistently applied to all of our ratings. In fact, we do not rate financial instruments that do not meet our criteria. As with newspapers and other media, we maintain a separation between the analytical and commercial activities associated with any given rating to ensure the independence of our opinions. In addition, we specifically structure our analysts' compensation so that it is not dependent upon the fees related to the ratings they assign.