Nuts and Dolts: S&P’s Defense to the DOJ Lawsuit

Posted on by Phil Querin

Nuts&DoltsAs some of my readers know, S&P, the largest of the ratings agencies, that in tandem with their investment banking cohorts, made millions – nay, billions – during the securitization frenzy of 2005 – 2007.  [For more details, see my rants posts, here and here.] The Big Banks needed a shill to convince investors to purchase their bundled mortgage backed securities, and so turned to S&P, Moody’s and to a lesser degree, Fitch, to rate them as “investment grade.” This meant that the large pension funds and municipalities could legitimately invest in the securities because they were perceived to be safe.

In biological terms, it was a “symbiotic relationship,” where each species depends upon the other for their long term survival.  Like the sucker and the shark.  In this case, the Big Banks (aka the voracious sharks) couldn’t sell their securities unless the ratings agencies (the little sucker fish) gave their products high marks, and the ratings agencies would have no business if they gave the Big Banks less than high marks.

To put a fine point on the ruse, the ratings agencies were the “enablers” of the Big Banks.  Without their high ratings, investors would never have consumed their toxic brew of securitized subprime loans like ambrosia.  The more investors consumed, the more the banks continued to pump and dump, until eventually, the entire house of cards collapsed, taking the American economy with it.  This stuff was so toxic that the only folks who made money were the Big Banks, who, like Goldman Sachs with its Abacus scam, bet against the success of the very investment they were touting as solid gold.

Even though it was widely known [see pages 243-317 of the Levin Report, here] that the agencies had been complicit with the Big Banks in rating straw as if it was spun gold, they had been largely ignored by the federal government, who, it seems, only now has started to grow a spine.

In the years following the 2008 financial implosion, the agencies were widely criticized for their bogus ratings that seemed tied more to the drive for profits than the drive for accuracy.  So, in what has to be viewed as a boneheaded business decision, S&P, trying to prove it could still render intelligent, insightful, and independent ratings opinions, decided in August 2011, to downgrade the United States of America, taking away its coveted AAA rating.  Moody’s and Fitch wisely stood on the sidelines, as they watched S&P throw itself under the Bus of Bad Judgment.

Hmmm.  Let’s see now.  This was the government that so far had not laid a hand on the ratings agencies, when so many people thought they should.  Do I have this right? Not surprisingly, on February 5, 2013, S&P got sued for $5 billion by the Department of Justice for fraud related to its bogus ratings during the securitization heydays, circa 2006 – 2007.

S&P’s first reaction was the same as the third grader who gets caught cheating: “But, but, but, Johnnie and Timmy were cheating too!  You’re just picking on me!  Waaah!” Now S&P lawyers have elevated this “defense” to a legal argument.  According to a recent Bloomberg Businessweek online article titled “The S&P Fraud Case As Theatre of the Absurd”:

The rating company has accused the Obama administration of “retaliation” for S&P’s downgrade of U.S. creditworthiness in 2011. “Only S&P Ratings downgraded the United States and only S&P Ratings has been sued by the United States, even though the S&P ratings challenged by the United States were no different than those of at least one other rating agency and other rating agencies have made the same assertions of ‘independence’ that are challenged in the complaint as against S&P,” the New York-based company said in the Sept. 3 court filing.”

Let me get this straight: S&P is claiming that the U.S. singled them out because they dissed the federal government?  And their point is what exactly?  What did they expect?  It would be one thing for Nelson Mandela to say the credit of the United States sucks.  Mr. Mandela hasn’t got a closet-full of skeletons.  But for S&P to make the downgrade – especially before the applicable statute of limitations had run on all its shenanigans – was an act of monumental stupidity.  [Surely they called their cohorts at Moody’s and Fitch to see if they were going to join the suicide mission?  It’s not as if they hadn’t talked before having their collective epiphany in July 2007 when they all “just happened” to make their mass credit downgrades of the same junk they had been hyping a year earlier.]

Riddle Me This, Batman:  Why should the DOJ take on all three agencies at the same time? Why not go after the one that just poked you in the eye?  By the time the DOJ gets through with S&P, you can be sure its other two partners in crime will have quietly settled for less money and far less fanfare.

Posted in Financial Crisis, Lawsuits, Miscellany, Ratings Agencies, Subprime Mortgages | Tagged ,
  • Categories

  • Archives