Skip to comments.Payback for a Downgrade? (The Feds sue S&P but not Moody's for pre-crisis credit ratings)
Posted on 02/06/2013 6:59:20 AM PST by SeekAndFind
Now, this is awkward. One agency of the federal government is suing a company for fraud while another agency continues to endorse it.
On Monday in Los Angeles, the Department of Justice sued Standard & Poor's and its parent McGraw-Hill MHP -0.25% for $5 billion. The claim is that S&P committed civil fraud when it issued high credit ratings on mortgage-related securities prior to the financial crisis of 2008. Sixteen states and the District of Columbia have piled on the suit.
No doubt investors who relied on the opinions of S&P and the other big credit-rating agencies, Moody's and Fitch, suffered terrible losses during the crisis. That was in part because the federal government forced investors to rely on them. Longstanding rules at the Securities and Exchange Commission and other agencies required institutions to hold assets graded highly by these government-approved rating agencies.
And to this day, more than two years after the Dodd-Frank law ordered their repeal, SEC rules still force institutions to follow the advice of these government-anointed credit raters. Therefore the more appropriate defendant for Monday's lawsuit would be the SEC. But as a modest first step before suing a company for $5 billion, shouldn't the government at least stop mandating its products?
We've long argued that the government should not endorse any company's opinions about credit risk, which at the end of the day is all a credit rating isan opinion. And for that reason the government will not have an easy time making a fraud case.
Justice quotes internal emails from S&P personnel suggesting that, in its desire to win rating assignments from the investment banks that created securities, S&P was too generous in handing out high grades.
(Excerpt) Read more at online.wsj.com ...
I am just surprised that US bonds have anything but a junk rating
List of assets owned by Berkshire Hathaway
Moodys Corporation (19.1%)
June 1, 2010, 6:21 PM
Warren Buffett to Break His Silence about Moodys
Warren Buffett usually loves talking about his investments both the successful ones and his few flops.
But Buffetts relationship with Moodys Investment Services is unusual. The CEO of Berkshire Hathaway has said very little about his 13% stake in the rating firm, which has come under heavy fire for its role in the financial crisis. You know the complaints by now: That Moodys and rivals S&P and Fitch negligently inflated ratings on mortgage securities, as they grew ever keener to win business from Wall Street banks and other underwriters.
Oh yeah, there are a whole lot of paybacks eminating from the District of Corruption - many more to come in the next 48 months of King Obama I.
Payback is a bitch.
I hope that S&P won’t be intimidated by this and continues to give the US exactly the rating deserved.
According to William Black, the last fed regulator who closed S&L during the S&L crisis of the 1980’s, finding the rating agencies guilty is not so hard. The key witnesses against the rating firms will be the analysts that work for it. One of the criterias to determine fraud or incompentence is comparing the firms actions against common practice of the industry. Example, Bank A pays rating agency to assign a rating for a mortgage portfolio. Analyst will ask for the data (includes applicants application/docs for each mortgage note in the portfoilio). Base on all the data given, the analyst can calculate the risk of the portfolio. Analyst can verify the info on the applicants application to double check the veracity of the loan data. Problem is many banks accepted/encouraged liar loans, where applicants made up income, asset info and the banks doctured the credit scores. Fearing the analysts working for the rating agencies will detect these aberate data, banks have refused to provide it to the analysts assigned to rate their products. Instead the bankers call the analysts supervisors to complain they were getting unsatisfactory service from the analysts and if the situation is not rectified the bank will take their future business to other rating agencies!!! Since the rating agencies are paid huge fees to analyze/rate bank products, they cave to the bankers’ pressure and instruct their analysts to find a way to satisfy the banker client. IAW assign a AAA rating or be fired. Many analysts fearing their reputation being damaged by the forced illegal acts have maintained copies of MFR just in case their AAA ratings become an issue again. I think the gov may have a case if many analysts testify of being pressured by management to assign a AAA rating despite the fact that the banks did not provide the data requested. The sad part is the rating agency CEO is the ones trapped between their analysts testifying against them and the banks denying they coerced the rating agencies into lying. Bottom line the CEO and exec are the ones going to jail and fined, not the analyst who were protesting the illegal act and the banker who created the mess.
Does the government pay the rating agencies to rate their bonds and other securities?
If not, wouldn’t it be like me suing a television sports handicapper who was shilling a line that I played and ultimately lost. In this scenario I’m not paying this guy, I’m just taking his “advice” that he has made public.
Guess who gets the money. Government agencies suing private enterprise has become a major source of funding for the beast. The pharmaceutical industry has been dealing with these reoccurring multi-billion dollar government feedings for a while now. They just work it into the price the productive sector must pay.
Nobody gets it. Of course it’s payback, but that’s not all — it’s a warning to the other ratings agencies not to downgrade the U.S. again. It also gives Obama cover to pretend that any future downgrades, whether by S&P or anybody else, is itself payback for this lawsuit.
They should be prosecuted for criminal fraud.
And convicted of same.
Wonder if he made a deal with Obama over S&P?.
Nobody gets it. Of course its payback, but thats not all its a warning to the other ratings agencies not to downgrade the U.S. again. It also gives Obama cover to pretend that any future downgrades, whether by S&P or anybody else, is itself payback for this lawsuit.
BINGO!!!!! With Obama and the Obamamites it’s ALWAYS about politics and PR maneuvering.