U.S. sues S&P over inflated security ratings that led to collapse

Posted this elsewhere, and I agree with Jason McC's comment: this should be fun.

I've always wondered why orgs like S&P didn't get punished in some way for rating the mortgage backed securities so highly, up to the very days they were shown to be worthless and the economy collapsed. And found it hard to believe they could have been so incompetent they didn't know the securities were weak and vulnerable.

The U.S. government is now going after S&P, saying that it basically kept the ratings on these unstable, risky, and weak securities high in order to make more money.

http://apnews.myway.com/article/20130205/DA48MPGO0.html

I wonder how S&P ends up singled out? All of the ratings agencies were pulling this shit. I assume it's just a matter of S&P is the one they can prove it for?

Also: the ratings agency conflict is like elementary economics. If you're getting paid by an issuer to rate a product, you're going to provide the rating the issuer wants. Unfortunately the other scenario (buyer pays you to provide a rating) has free-rider issues.

If I was going to design a rating regimen, I'd either a) have the government do it or b) have it done with a government intermediary on a flat-fee basis where the rater is assigned randomly and is firewalled such that they do not know whose product they are rating.

This is off the cuff, but isn't S&P the one who downgraded us?

Seems we have jeffd's answer as to why they are being singled out =)

Probably!

In all seriousness, I suspect they caught some S&P managers or something admitting they knew they were giving bogus ratings. All three agencies were doing it, but I'd guess S&P was the only one dumb enough to get caught.

It's because America hates the Poors.

S&P was hopelessly conflicted and probably at least negligent, if not culpable during the whole CDO etc debacle, but this screams Wall Street sacrificial goat.

I don't see any action being taken against:

• The actual ISSUERS of the toxic over leveraged products and in some case just flat out made up (sorry "synthetic") crap "investment products" that the ratings agency put their stamp on. These would be firms like Goldman Sachs, Lehman Brothers et al. The ratings agencies would have made pennies to the pounds each Investment Bank issuer of CDOs made on your average offering. Do they not have any responsibility for creating the toxic products?
• The so called "sophisticated" fund managers who put their clients money into any CDO shite waved in their direction by the likes of Goldman Sachs, just because some chucklehead "ratings agency" stamped AAA on the front. Where is their responsibility for doing due diligence, or their fiduciary duty to their clients to take due care and attention when investing funds entrusted to them?

Also, pretty sure they do have emails from S&P of the sort where lower level types email each other about the "shit" they are rating, so it should be an easy win for the DoJ.

S&Ps lawyer is all over business cable news saying stuff like "Well I aint SAYIN its because we downgraded them sumbitches, but I am sayin them investigator types suddenly got real dayum BUSY LIKE after we downgraded their sweet little ass, if you know what I mean". They are also going with the "NO ONE PREDICTED THE FINANCIAL COLLAPSE" and "WELL THE OTHER GUYS RECKONED EVERYTHING WAS FINE TOO" defence.

The other thing to think about - The DoJ has NEVER seen a Wall Street case it wouldn't mind settling. They even settled with HSBC who laundered money for IRAN and Mexican drug cartels. Oh and when they settle, they NEVER ask for an admission of fraud / criminality / personal culpability by executives - because that would open up the settling firm to separate third party lawsuits from customers, people they shafted on the other side of a deal, shareholders etc.

Yet they couldn't reach a settlement with S&P and asked for an admission of fraud. hmmmmmmm.

http://online.wsj.com/article/SB10001424127887324445904578285802822704578.html

I'm going to let you in on a secret - "people familiar with the matter" are most likely press officers working for the DoJ.

http://www.nytimes.com/2013/02/06/opinion/standard-poors-stands-accused.html?_r=0

The quantum of damages asked for is also insane. The owner of S&P (McGraw Hill) has a market cap of around $15 - $16 billion (pre the DoJ suing them). They take in about $6 billion a year in revenues, make around $800 million in profits.

ie. the DoJ wanted to wipe out one whole years worth of profits from them in damages. By the way, the S&P business actually only makes up part of the McGraw Hill company. The actual ratings business only pulled in $1.7 billion in revenue for 2011. if we figure a similar profit margin to the overall business (probably wrong, but hey) DoJ was asking for FIVE YEARS OF THE PROFITS of the S&P business in damages. No wonder they couldn't settle.

I could go and check what they made in 2007 which could be more relevant. I could even use their damn fancy S&P Capital IQ product to do it :-) But i think you get the idea of the relative size of the company versus the demanded settlement. These guys are minnows compared to the banks who actually created the toxic investment products they just put a stamp on saying "Looks OK to me"

How much did our friends at HSBC settle for? $1.9 billion or FIVE WEEKS of income

BURN THE WITCH!!

One theory of government reluctance to legally prosecute big banks is that it would end in de-facto nationalization, which is a policy that the government has decided not to pursue. The Obama administration probably could have nationalized the big investment banks in 2009 and decided not to; a vigorous prosecution would probably destroy its target and result in nationalization.

On the other hand, S&P isn't important to the structure of the financial system; they can go down without much collateral damage. So they're going to end up being the sacrificial lamb. Personally I think it's silly and we should go after the issuers, but it's better than nothing I suppose.

It's the Wall Street prosecution equivalent of throwing the book at Capone's driver. In case you can't tell, this makes me really mad! (not you Jeffd, the wimpish behaviour of the DoJ towards too big to fail villains.)

I don't blame you! I'm mad too, though at this point I simply don't expect that the big investment firms will see criminal charges. Like I said, that'd basically be a move toward nationalization which the administration has taken off the table.

If S&P really wants to get serious in their defence strategy (both legal and PR) they need to stop with this "revenge for the downgrade" and "everyone else was a total chucklehead" nonsense and start dishing maximum dirt on every Wall Street bank that ever leant on them for a favourable rating.

It's the absolute nuclear option, because it bites the hand that feeds them, but I don't see much other choice for them if they don't want to be publicly flagellated for the next several years in order to prove the DoJ can be tough on "wall street" criminals.

Yes, if they're smart they'll see what kind of deal can be had asap.

Unless I'm missing something, no. They were financial investments, and as long as everything was full disclosed - which it was, more l or less - I'm not sure what they could be hit on. It'd kind of like people who bought pets.com stock - what did you expect?

In a lot of the reporting there's tantalizing hints that there maybe have been fraud involved in some of those securities, but I'd imagine that proving it, combined with the caveat emptor nature of the deal that you identified, would make prosecutions tough.

Does anyone know what kind of fiduciary responsibility an investment bank has with regards to its various clients? I'd guess that if it's acting purely as a broker/dealer it's basically zero, but I think in some cases there were other relationships involved that muddy the waters significantly.

There is some smoke on that front, but not yet any real fire -

http://www.reuters.com/article/2011/10/28/us-goldmansachs-lawsuit-idUSTRE79R4JE20111028

In the end, I expect you are right and so long as everything was disclosed, its a case of caveat emptor.

I think this area is tricky, and as you suggest complicated by the fact that often the Bank will be its own client and then working for the client. There was a landmark case here in Australia that did actually find there was a fiduciary duty to the client:

http://www.smh.com.au/business/lehman-ordered-to-pay-councils-millions-20120921-26bxk.html

Basically the local arm of Lehman went around targeting small unsophisticated local town councils and convincing them to park their cash in CDOs instead of bank accounts / term deposits.

I can see the investment banks catching hell for intentionally selling shit, but the originators seem to be immune short of out and out lying in their statements.

You mean the originators of the loans that were subsequently securitized?

Closest thread I could find for this.

Sen. Al Franken’s plan to prevent the next financial meltdown: A clean-up of the credit rating system

Franken kind of let me down on other issues but this seems a worthy endeavor. I can't wait for it to die in committee!

And why not: Elizabeth Warren makes explicit the difference in relative utility to society between indefinitely sponsoring banks and cutting back the exploitation of the student loan system.

Is it inappropriate for me to say I want to marry Elizabeth Warren? ;-)

Given that she's already married, probably? :)

Elizabeth Warren's actual letter to the administration.

We're not all that big of fans of the Standards either.