U.S. Accuses S.&P. of Fraud in Suit on Loan Bundles

Shira A. Scheindlin and the First AmendmentJustice Department filed civil fraud charges late on Monday against nation’s largest credit-ratings agency, Standard & Poor’s, accusing the firm of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck. The suit, filed in federal court in Los Angeles, is the first significant federal action against the ratings industry, which during the boom years reaped record profits as it bestowed gilt-edged ratings on complex bundles of home loans quickly went sour. High ratings made investments appear safer than they actually were, and are now seen as having contributed to a crisis that brought the financial system and broader economy to its knees. More a dozen state prosecutors are expected to join the federal suit, and New York attorney general is preparing a separate action. The Securities and Exchange Commission has also been investigating possible wrongdoing at S.& P. From September 2004 through October 2007, S.&P. “knowingly and with intent to defraud, devised, participated in, and executed a scheme to defraud investors” in certain mortgage-related securities, according to the suit filed against agency and parent company, McGraw-Hill Companies. S.&P. also falsely represented its ratings “were objective, independent, uninfluenced by any conflicts of interest,” the suit said. S.& P., first contacted by federal enforcement officials three years ago, said in a statement Monday in anticipation of the suit that it had acted in good faith in issuing the ratings. “A D.O.J. lawsuit would be entirely without factual or legal merit,” it said, adding its competitors had given exactly the same ratings to all securities it believed to be in question. Settlement talks between S.& P. and Justice Department broke down in the last two weeks after prosecutors sought a penalty in excess of $1 billion and insisted that the company admit wrongdoing, several people with knowledge of the talks said. That amount would wipe out the profits of McGraw-Hill for an entire year. S.& P. had proposed a settlement of around $100 million, the people said. S.& P. also sought a deal that would allow it to neither admit nor deny guilt; the government pressed for an admission of guilt to at least one count of fraud, said people. S.& P. told prosecutors it could not admit guilt without exposing itself to liability in a multitude of civil cases. It was unclear whether state and federal authorities were looking at the other two major ratings agencies, Moody’s Investors Service and Fitch. A spokesman for Moody’s declined to comment. A spokesman for Fitch, Daniel J. Noonan, said the agency could not comment on an action appeared to focus on Standard & Poor’s, but added, “we have no reason to believe Fitch is a target of any such action.” The case against S.& P. focuses on about 40 collateralized debt obligations, or C.D.O.’s, an exotic type of security made up of bundles of mortgage bonds, which in turn were composed of individual home loans. The securities were created at the height of the housing boom. S.& P. was paid fees of about $13 million for rating them (…..)

Link: http://dealbook.nytimes.com/2013/02/04/u-s-and-states-prepare-to-sue-s-p-over-mortgage-ratings/

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Consultor Internacional

5 Responses to U.S. Accuses S.&P. of Fraud in Suit on Loan Bundles

  1. Professor Uziel Nogueira says: The risk assessment agencies played a fundamental role in a financial system out of control. S&P and other risk agencies worked in collusion with Wall Street to exploit the weak foreign debt position by countries such as Brazil, Argentina and Mexico during the late 90s. The game played by the risk agencies was simple. Latin America debt always negative, Wall Street papers always positive. In the US risk agencies took a highly positive view on toxic papers being traded in Wall Street. In Latin America, S&P risk assessments of foreign debt were always negative. This helped Wall Street’s financial firms to mount speculative attacks against local currencies and public debt, leading to foreign debt defaults, followed by loans from the IMF and more misery and poverty for millions. From a Latin American perspective, the indictment of S&P is poetic justice done in its place of origin.

    http://dealbook.nytimes.com/2013/02/04/u-s-and-states-prepare-to-sue-s-p-over-mortgage-ratings/

  2. PB: Ask a class of high school students (maybe even middle school students) what problems they think might occur if big credit-rating agencies are paid by the firm issuing the security or bond they are supposed to rate. What do you think the kids would say? If you have a class of pretty smart high school students in an economics or history class, try this one. Describe what commercial banks and investment firms do, and then describe banking and investment practices that led to the Great Depression in 1929. Ask the students which they think would be better and safer for an economy: (1) have a law that says commercial banks that take in depositors’ money and make loans cannot also be involved with or affiliated with investment firms that buy and sell securities and bonds for their customers; or (2) there does not need to be any law prohibiting commercial banks from also having affiliations with investment firms. To be more concrete, ask them what they think could happen if large banks like Citibank also have affiliations with a very large investment firm like Solomon-Smith-Barney? Obviously, you can’t leave this to those adults who are too busy chasing money to figure out the consequences of their actions–or to care what happens to others and their community/country.

    http://dealbook.nytimes.com/2013/02/04/u-s-and-states-prepare-to-sue-s-p-over-mortgage-ratings/

  3. Professor Uziel Nogueira says:


    Why a country with millions of educated citizens and a sophisticated elite were doped by a bunch of wiz kids operating in Wall Street? This is the question that smart high school kids may be asking their teachers nowadays.

    http://dealbook.nytimes.com/2013/02/04/u-s-and-states-prepare-to-sue-s-p-over-mortgage-ratings/

  4. The executive at Standard & Poor’s was clear: “This market is a wildly spinning top which is going to end badly.” That sober assessment of certain mortgage-related investments, delivered to colleagues in a confidential memo in December 2006, is now part of a trove of internal e-mails and documents that have come to light in a federal suit against S.& P., the nation’s largest credit ratings agency. The correspondence, made public in court documents late Monday, provide a glimpse at the inner workings of an institution that the Justice Department says fraudulently inflated credit ratings, with dire consequences for the entire economy. In a series of e-mails, tensions appeared to be escalating inside the firm’s headquarters in Lower Manhattan as it publicly professed that its ratings were valid, even as the home loans bundled into mortgage-backed securities, or M.B.S., were failing at accelerating rates. One comes from an S.& P. analyst in March 2007 borrowing from the Talking Heads song “Burning Down the House,” creating new lyrics: “Subprime is boi-ling o-ver. Bringing down the house.” S.& P. said prosecutors cherry-picked e-mails and that it would vigorously defend itself from “these unwarranted claims.” In another 2007 e-mail, an analyst responds to a question about his new job: “Job’s going great. Aside from the fact that the M.B.S. world is crashing, investors and the media hate us and we’re all running around to save face … no complaints.” Together, the documents show a portrait of some executives pushing to water down the firm’s rating models in the hope of preserving market share and profits, while others expressed deep concerns about the poor performance of the securities and what they saw as a lowering of standards. The United States attorney general, Eric H. Holder Jr., joined by attorneys general from 16 states, unveiled the case on Tuesday in Washington, accusing S.& P. and its parent, the McGraw-Hill Companies, of intentionally propping up ratings of shaky mortgage investments and setting them up for a crash when the financial crisis struck (…..)

    http://dealbook.nytimes.com/2013/02/05/case-details-internal-tension-at-s-p-amid-subprime-problems/

  5. Professor Uziel Nogueira says: S&P perhaps could be found guilty and pay penalties. However, the law of unintended consequences is already in motion. From now on, credit risk agencies will be more rigorous in their financial risk assessments. This includes US government debt already lowered one notch down from the top triple A category. This means federal debt becoming more expensive to be financed and taxes being raised to pay for it.


    One thing for sure. Folks at Treasury Department are certainly not excited about their colleagues at the Justice Department going after the credit risk agencies, starting with S&P.

    http://dealbook.nytimes.com/2013/02/05/case-details-internal-tension-at-s-p-amid-subprime-problems/

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