The Real Story Behind Justice’s Decision to Sue S&P

Posted on by Phil Querin

Regrettably, I cannot disclose the source that provided me with this purloined post. ~ PCQ

Lead Chief Counsel:  “OK, everyone, I think we’re ready to start.  You were emailed the agenda last week, so there should be no surprise what today’s topic is: How to convince the American public that we have the cajones to go after some of the biggest Wall Street offenders for their part in bringing about the worst financial crisis since the Great Depression.  This meeting is being recorded.  Della here will transcribe it.  But remember, this is highly confidential. If I hear of anyone leaking this discussion to the press, heads will roll.  I will deny this meeting ever occurred, and claim that it was a piece of pure satire by that crafty real estate lawyer and blogger Phil Querin.”

Assistant Counsel:  “Excuse me, sir, I know I’m one of the junior guys in the room, but after three years here, I’ve gotta say that the American public’s perception seems pretty close to dead-on right.  I was a private attorney during the corporate scandals involving Enron, Worldcom and Tyco, back in 2001 – 2005.  Besides CEOs, CFOs and others going to jail, I remember when the Sarbanes-Oxley Act was passed.  It was touted as a tough new law that would finally restore the public’s confidence in its corporate leaders.  It mandated new rules for corporate governance and included several criminal provisions for miscreants.  One of the most significant provisions of “SOX” was a requirement that CEOs and CFOs certify under oath that their financial statements were accurate and that their companies had sufficient internal controls so that investors had access to all relevant financial information. Knowingly certifying false information could put an executive in jail for five years. Last time I checked, after HealthSouth, we never went after another big company head, despite plenty of opportunities from Countrywide, to Bear Stearns, to Lehman Bros, to Washington Mutual, etc., etc., etc.”

Deputy Lead Assistant Chief Counsel:  “Yeh, I remember ever since 2006 I kept thinking that any time now I would be seeing a photo of Angelo Mozilo, the former CEO of Countrywide, with a rain coat over his head doing a perp walk on the front page of the New York Times.  It never happened.  We’ve had plenty of opportunities over the years, but after lackluster and tepid investigations that drag on for months, we never close the deal.  It’s as if the prosecutors have some sort of “performance anxiety” and can’t quite pull the trigger.  In medical terms, I’d say the DOJ is impotent. You know what I think?  I think that after we lost the $2.7 billion SOX false certification case in 2006 against Richard Scrushy, HealthSouth Corp.’s former CEO, the DOJ lost its nerve. Instead of going after the big boys with their high-priced lawyers, they began going after the Ratso Rizzos on the street – those easy-to-prosecute cases against small fry that we could scare into a plea bargain.”

Lead Chief Counsel:  “OK, enough!  First of all, I don’t want to hear this kind of a discussion repeated in public.  That’s why we’re here today; to quietly find a ‘soft’ target with name recognition for us to take down, without a lot of work or risk. We need a “W” in the win column.  So can I have some constructive ideas?”

Assistant Deputy Chief Counsel: “Well, I have an idea.  I don’t know how many of you read Senator Levin’s 2011 report on the financial crisis, but it’s quite an eye-opener.  The section on the ratings agencies, S&P, Moody’s and Fitch, is a page-turner.  It’s like reading the script for The Sting.  The Report is thoroughly researched with footnoted letters, emails, sources and citations.  It tells exactly how the ratings agencies worked hand-in-glove with the big investment houses teaching them – for a fee, of course – how to put lipstick on a pig.  That is, how to make subprime and no-doc loans appear to be “investment grade” so institutional investors could buy them. They learned little tricks like using “credit enhancements” such as private mortgage insurance, to add to what was otherwise junk, in order to get better ratings.  It was like putting a pinch of wheat germ into a high-calorie milkshake and then selling the drink as “healthy.” And if that wasn’t enough, the ratings agencies then charged the investment banks to give their bogus ratings to the securities they were selling so that large investors would buy them en masse.  And it worked like a charm.  Instead of pouring over every word in the prospectus or flyspecking the small print disclaimers saying the ratings were just “opinions,” the investors went after the bonds like ants to a picnic. Then, in an amazing coincidence of telepathy and timing, all of the ratings bureaus began making mass downgrades of the toxic loans at the same time.    According to the Levin Report: “…in July 2007, the credit rating agencies instituted a mass downgrade of hundreds of mortgage backed securities, sent shockwaves through the economy, and the financial crisis was on.  By first instilling unwarranted confidence in high risk securities and then failing to downgrade them in a responsible manner, the credit rating agencies share blame for the massive economic damage that followed.”  Billions of dollars of value was lost virtually overnight as big investors began dumping their holdings like it was toxic sludge.”

“For years the ratings agencies had been telling big investors that the investment houses were spinning straw into gold.  Then, in July 2007, like Paul on the road to Damascus, scales fell from their eyes and they saw that it was just straw, after all.  That was the day the music died. From that moment on, the financial crisis was off and running.  During the following twelve months into 3Q 2008, the damage metastasized and resulted in Big Bank write downs of billions of dollars.  The casualty list was impressive in a ‘Rogue’s Gallery’ sort of way: Bear Stearns saw its stock go from $170.00 to $2.00 per share – it was acquired by JPMorgan at Filene’s Basement prices; Lehman Bros. was forced into bankruptcy; there was the shotgun wedding of Washington Mutual to JPMorgan; and in what The Wall Street Journal suggested was the “worst deal in history,” Bank of America acquired Countrywide, and then doubled-down by also taking over Merrill Lynch.  In short order, Fannie Mae and Freddie Mac failed, and AIG, recently described in Barrons as “…the formerly bankrupt, formerly destitute, formerly craven gambling company….” had a near death experience until it was bailed out by the federal government’s $124 billion “investment” because the insurer owed billions in counterparty debt to the likes of Goldman Sachs – who had bet against their own CDO offerings by purchasing credit default swaps, i.e. “insurance” from AIG.  In short, Goldman made money when it sold its investors crappy CDOs, and then made even bigger profits on the swaps when the bonds collapsed because of the agencies’ mass downgrades.”

Lead Chief Counsel:  “I appreciate the similes and metaphors, but can we get to the point? It’s almost Cocktail Hour.”

Assistant Deputy Chief Counsel:  “Sorry, sir. Anyway, so my thought is, why don’t we assign as mandatory reading to everyone in the room today, the chapter in the Levin report on the ratings agencies’ shenanigans? It is so detailed and documented that we won’t have to do any heavy lifting. It will be like reading ‘Criminal Prosecution for Dummies’. We simply plagiarize paraphrase the Levin Report, write a hundred page complaint full of the juiciest tidbits, send advance copies to a few of our gullible friends in the press, and let them run with it. By the time the American public reads about it in the news, they will be sufficiently inflamed that the agencies will be found guilty in the court of public opinion.  We’ll already have half the battle won.  By the time it gets to a court of law, the judges and jury pool will be so angry about the whole sordid mess that we can try the case on autopilot.”

Deputy Associate Assistant Lead Counsel:  “Hmmm. Not bad.  So instead of going after the Big Banks, we go after their enablers that encouraged everyone to buy their products. The snake oil salesmen are ignored, but their shills in the crowd saying the stuff is safe, get strung up.  It’s not like the ratings agencies were innocent bystanders.  Some might say that without their active complicity – for which they were very well paid – the entire Wall Street Securitization Scam could never have been perpetrated.  No one would have bought the junk.  This wasn’t like investors buying residential mortgage bonds from Fannie and Freddie – at least those securities had the implicit guarantee of the federal government. But since Fannie and Freddie had much stricter controls over the types of paper they would purchase from the banks, the no-doc and liar loans had to be sold into the private label secondary market.  This is what made the ratings agencies so important for the scam to work.  Investors had to be convinced the subprime junk that was being bundled up and sold to them was “investment grade.”  So instead of telling them that what they were being fed was actually prison food from strange and mysterious sources, it was described on the menu as filet mignon in chanterelle sauce with Dom Pérignon.  Not bad; the chef gets off, but the waiter who raves about the fare is thrown under the food cart, so to speak.”

Deputy Assistant Associate Chief Counsel:  “Just a couple of questions.  First, do we really want to pursue the rating bureaus under Sarbanes Oxley?  We saw what happened with Scrushy and SouthFirst. It’s not like we can call up Eliot Spitzer and have him come on board as special counsel.  Once he changed careers, and went from being New York’s fearless Attorney General and later Governor, to become “Client-9”, he was voted off the island of Manhattan.  His legal credibility vanished with his reputation.”

Assistant Deputy Counsel:  “I have a suggestion: I remember reading that back in the early 80’s there was a law created after the S&L crisis.  It had an acronym, FIRREA, I think.  Don’t ask me what it stands for, though.  Anyway, what I remember about the law was that you didn’t have to prove guilt beyond a reasonable doubt – just preponderance of the evidence. Secondly, it requires the offenders to repay all of their ill-gotten gains – not just a little financial slap on the wrist. It will be a whole lot easier to hit a home run, and the American public won’t know the difference.  They’ll think we’re really tough, going against a big ratings agency, and they won’t realize that the legal bar for winning is a lot lower than if we had to meet the criminal fraud standard of guilt beyond a reasonable doubt. So we get our street cred back – and maybe even our mojo!”

Deputy Assistant Associate Chief Counsel:  “Alright, good idea. As an aside, I think it’s always remarkable that all the laws that are supposed to prevent the recurrence of financial abuses come after the damage has already occurred.  I thought that regulators were supposed to ‘regulate.’  We had RESPA, the Securities and Exchange Act, the FDIC, the Federal Reserve, the Treasury Department, Comptroller of Currency, the Federal  Trade Commission, FSLIC and a host of other regulations and regulators, but the financial abuses that led to the crisis still occurred.  Remember, this wasn’t some scam committed under cover of darkness.  It was going on in plain view of everyone whose job it was to see and appreciate what was happening. Where were they for the three years these abuses were occurring?

But I digress.  My second question is this: Do we have to go against Moody’s, S&P and Fitch all at the  same time?  While they were all culpable to a degree, doesn’t this make our job three times as hard?  I’m a government employee in the Obama Administration.  I’m not supposed to have to work that hard.  I say we go after S&P or Moody’s to start. Fitch is ‘small potatoes’ – to continue the food analogy.  But how do we choose between S&P and Moody’s?  We know that if we pick one, they will just complain that the other one was doing it too and we didn’t go after them.  It’s like choosing between Bonnie or Clyde.”

Assistant Deputy to Associate Chief Lead Counsel:  “Well, that’s really not so bad. It’s like putting the suspects in different interrogation rooms and letting them each rat on the other.  The one that flips first gets immunity or some other break, like going to Club Fed rather than a hole-in-the-ground super-max pen.”

Lead Chief Counsel:  “OK, it’s settled then.  I’ll select either S&P or Moody’s.  I’m going to flip this coin – heads it’s Moody’s, tails it’s S&P….  Tails it is!  Alright everyone. Tonight’s reading assignment is pages 243 to 317 of the Levin Report. We’ll meet back here tomorrow, same time, and start plagiarizing paraphrasing it for our complaint.  Remember, not a word about this to anyone. We don’t want this transcript to fall into the hands of Julian Assange or one of his Wikileaks acolytes. If it ever saw the light of day and that malcontent blogger, Phil Querin, got it, we’d be toast.  I’ll see you all tomorrow!  Wow!  This is exciting going after the big dogs, for once.  And thanks to Senator Levin, it’ll be as easy as painting by numbers!  I think I feel my mojo coming back!”

Posted in Fannie&Freddie, Financial Crisis, GSEs, Legislation - Federal, Lenders, Market Conditions, Miscellany, Real Estate/Distressed, Subprime Mortgages | Tagged , , , , ,
  • Categories

  • Archives