U.S. Securities and Exchange Commission

Public Hearing-November 21, 2002

Role and Function of Credit Rating Agencies
in the Securities Markets: File No. 4-467

Introductory Comment
Jack Malvey, CFA
Managing Director
Chief Global Fixed Income Strategist
Lehman Brothers

Thank you for inviting Lehman Brothers to participate in this fascinating discussion. I hope that I will be able to offer some worthwhile insights about the role of rating agencies across the global debt capital markets.

For just over 27 years, including the past 19 on the sell-side, I have worked as a credit analyst, head of investment-grade credit research, corporate bond strategist, and chief global fixed-income strategist. In the spirit of openness, I should also add that I worked as a rating analyst at Moody's Investors Service from June 1978 through November 1983.

In my view, the rating agencies have been an indispensable contributor to the tremendous growth of the global fixed-income market over the past century. Based primarily on the agencies' credit-quality classifications, trillions of dollars of capital have been successfully channeled to economically worthy purposes.

The long-term performance of the rating agencies over the past century has been admirable. Numerous academic studies have confirmed a very high correlation between aggregate credit risk and ratings.

There are no mortals or institutions with perfect clairvoyance. As economists and market strategists can well attest, forecasting the future can be difficult. Likewise, ratings cannot be perfect predictors of ultimate credit risk for every single issuer.

After each major corporate bankruptcy or sovereign default, markets engage in a natural bout of second guessing. This is a healthy exercise. Through such post mortems, credit diagnostics are improved.

In my view, additional regulatory oversight of rating agencies is unnecessary. Through the years, the rating agencies have consistently demonstrated a zeal to enhance their rating methodology. And depending upon its nature, further regulatory oversight might introduce new subjectivities to the rating process that could lead to the misallocation of capital.

The credit markets may well benefit from the presence of additional officially-recognized rating agencies. In turn, we would favor the Commission's willingness to more quickly designate applicants as Nationally Recognized Statistical Rating Organizations ("NRSROs"). In the end, the markets should determine which ratings agencies should be relied upon for the most accurate sorting of credit risks.

I look forward to participating in the ensuing discussion.