US Sues S&P

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retiredjg
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US Sues S&P

Post by retiredjg » Tue Feb 05, 2013 10:58 am

I found this very interesting.

http://news.yahoo.com/us-sues-p-over-pr ... nance.html
WASHINGTON (AP) — The U.S. government is accusing the debt rating agency Standard & Poor's of fraud for giving high ratings to risky mortgage bonds that helped bring about the financial crisis.

The government filed a civil complaint late Monday against S&P, the first enforcement action the government has taken against a major rating agency related to the financial crisis.

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runner9
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Re: US Sues S&P

Post by runner9 » Tue Feb 05, 2013 11:09 am

Most of my thoughts on this are political so I'll not share any of them. :D

That said, I read in the article in the paper that they're a division of McGraw-Hill. I didn't know they did anything other than publish books until reading that.

northstar22
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Re: US Sues S&P

Post by northstar22 » Tue Feb 05, 2013 12:09 pm

After reading Michael Lewis' "The Big Short", the only surprising this is that it took this long.

retiredjg
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Re: US Sues S&P

Post by retiredjg » Tue Feb 05, 2013 12:58 pm

northstar22 wrote:After reading Michael Lewis' "The Big Short", the only surprising this is that it took this long.
Investigations can take a very long time. Then, once presented to the US Attorney's office, it takes that much time (again) to fill in all the holes they poke in it. :D

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Re: US Sues S&P

Post by Grt2bOutdoors » Tue Feb 05, 2013 1:17 pm

runner9 wrote:Most of my thoughts on this are political so I'll not share any of them. :D

That said, I read in the article in the paper that they're a division of McGraw-Hill. I didn't know they did anything other than publish books until reading that.
They are a publisher of financial opinions. How do they make money? Why, by selling of course. The more you sell, the more you make! :oops: BTW, they are selling their educational textbook publishing business to focus on S&P only - apparently it's more profitable. Who would have known? :greedy :moneybag :greedy
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Rick Ferri
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Re: US Sues S&P

Post by Rick Ferri » Tue Feb 05, 2013 1:22 pm

The issue here is payment for order flow. I'm Goldman Sachs and I'm selling a sub-prime mortgage collateralized debt obligation (CDO) that is composed of slices from other CDOs and maybe synthetic CDO (bets on sub-prime rates not actually backed by mortgages). There is no crime here because although I am selling a very complicated security, the buyers pride themselves on being extremely savvy investors (read Boomerang by Michael Lewis).

Here is the issue. I want my secrutieis to carry the highest rating possible. So, I show the street the securities and ask for bids. First to S&P, then Moody's, Fitches, etc. The winner of my business is the firm that gives my CDO the highest rating. Since CDOs are all the rage, all the rating agencies compete vigorously for the business. And that's how junk sub-prime CDOs become AAA rated securities.

So, the questions is this, did anyone commit a crime? My answer is no. Did S&P act ethically. No, but when has acting unethically been illegal at rating agencies or any Wall Street firm?

They'll pay for their stupidity. It's not yet known how much.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: US Sues S&P

Post by Grt2bOutdoors » Tue Feb 05, 2013 1:55 pm

Rick Ferri wrote:Here is the issue. I want my secrutieis to carry the highest rating possible. So, I show the street the securities and ask for bids. First to S&P, then Moody's, Fitches, etc. The winner of my business is the firm that gives my CDO the highest rating. Since CDOs are all the rage, all the rating agencies compete vigorously for the business. And that's how junk sub-prime CDOs become AAA rated securities.

So, the questions is this, did anyone commit a crime? My answer is no. Did S&P act ethically. No, but when has acting unethically been illegal at rating agencies or any Wall Street firm?

They'll pay for their stupidity. It's not yet known how much.

Rick Ferri
The talk is $1Billion, that is chump change for a company that size with a commanding slice of the opinion market. Interesting tidbit - once had a conversation with someone associated with that firm - their sole concern was "what way can I find to sell more" - that's it. They are salesmen paid a commission for writing an opinion where the information is fed to them from the one they are be asked to opine on. Too much self-interest. Have you noticed they seem to only proclaim the issuer dead long after it has become apparent to everyone but them?
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Re: US Sues S&P

Post by zotty » Tue Feb 05, 2013 1:58 pm

Grt2bOutdoors wrote:Have you noticed they seem to only proclaim the issuer dead long after it has become apparent to everyone but them?
Yes. It reminds me of stock analysts who downgrade stocks after they tank. Perhaps it's the same thing.
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Re: US Sues S&P

Post by NoVa Lurker » Tue Feb 05, 2013 2:23 pm

In sum, the rating agencies are for-profit companies, selected by the very entities that they are rating.

No idea about the merits of the lawsuit, but it boggles my mind why anyone would ever trust credit ratings. It is scary that so many institutions still feature credit ratings in their investment guidelines that essentially allow them to invest without limits, and without any specific diligence, in AAA-rated securities.

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Re: US Sues S&P

Post by Grt2bOutdoors » Tue Feb 05, 2013 2:37 pm

NoVa Lurker wrote:In sum, the rating agencies are for-profit companies, selected by the very entities that they are rating.

No idea about the merits of the lawsuit, but it boggles my mind why anyone would ever trust credit ratings. It is scary that so many institutions still feature credit ratings in their investment guidelines that essentially allow them to invest without limits, and without any specific diligence, in AAA-rated securities.
They feature the credit ratings to provide uniformity and consistency. Can you imagine if Vanguard said they were setting up an investment grade bond fund but then used their own criteria to determine what is investment grade? They could be holding junk and you would not be any wiser to it. Or vice versa - one man's treasure is another person's idea of junk. The problem here is all three industry players were in bed together if one rated AAA the other would follow suit or offer a notch lower - if you know or believe the instruments in the trust were of questionable value, a one notch lower rating is insignificant but rating the same security a CCC would make folks stand up and take notice. Did we see that in '05-08? No. There was too much complicitness and turning of the head when stamping the good housekeeping seal of approval. Anyone who stood up and said anything was laughed off as being a kook.

Here's an idea - for every opinion written, a bond should be posted. Should any fraudulent findings come into play, the bond gets paid out. Of course, the premiums will diminish their profit-making abilities. But it would diminish the self-interest aspect. It should be structured as something similar to a lawyer being disbarred, but the wholesale liquidation of a public company would be politically infeasible. Now, something on the order of ArthurAndersen might be feasible, essentially these firms should be licensed, a indictment by the governing party would be forfeiture of said license and send a swift message to others. Not that Arthur Andersen failing seemed to have corrected that, but it would be a significant step in the right direction.
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Re: US Sues S&P

Post by Levett » Tue Feb 05, 2013 3:02 pm

The question is NOT about whether a ratings agency committed a crime.

A CIVIL complaint has been filed.

"The difference between civil law and criminal law turns on the difference between two different objects which law seeks to pursue - redress or punishment. The object of civil law is the redress of wrongs by compelling compensation or restitution: the wrongdoer is not punished; he only suffers so much harm as is necessary to make good the wrong he has done. The person who has suffered gets a definite benefit from the law, or at least he avoids a loss. On the other hand, in the case of crimes, the main object of the law is to punish the wrongdoer; to give him and others a strong inducement not to commit same or similar crimes, to reform him if possible and perhaps to satisfy the public sense that wrongdoing ought to meet with retribution.”

Lev

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tetractys
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Re: US Sues S&P

Post by tetractys » Tue Feb 05, 2013 3:36 pm

S&P argues publicly that they are innocent because they had no idea what the markets were about to do, just like everybody else. How stupid can an argument be? Very. What does the future have to do with lying about a security risk in the present? Nothing. Maybe diverting public opinion with such a ridiculous statement will, in a shameful way, help their case; but I hope not. We'll see if the pundits pick this up, and in so doing, see who's getting the most grease.
Rick Ferri wrote:Here is the issue. I want my secrutieis to carry the highest rating possible. So, I show the street the securities and ask for bids. First to S&P, then Moody's, Fitches, etc. The winner of my business is the firm that gives my CDO the highest rating. Since CDOs are all the rage, all the rating agencies compete vigorously for the business. And that's how junk sub-prime CDOs become AAA rated securities.
No, I don't think fraudulently rigging the bid is legal; but we'll see how it goes. -- Tet

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Re: US Sues S&P

Post by 13characters » Tue Feb 05, 2013 4:09 pm

NoVa Lurker wrote:In sum, the rating agencies are for-profit companies, selected by the very entities that they are rating.

No idea about the merits of the lawsuit, but it boggles my mind why anyone would ever trust credit ratings. It is scary that so many institutions still feature credit ratings in their investment guidelines that essentially allow them to invest without limits, and without any specific diligence, in AAA-rated securities.
Grt2bOutdoors wrote: Here's an idea - for every opinion written, a bond should be posted. Should any fraudulent findings come into play, the bond gets paid out. Of course, the premiums will diminish their profit-making abilities. But it would diminish the self-interest aspect. It should be structured as something similar to a lawyer being disbarred, but the wholesale liquidation of a public company would be politically infeasible. Now, something on the order of ArthurAndersen might be feasible, essentially these firms should be licensed, a indictment by the governing party would be forfeiture of said license and send a swift message to others. Not that Arthur Andersen failing seemed to have corrected that, but it would be a significant step in the right direction.
Rick Ferri wrote:Here is the issue. I want my securities to carry the highest rating possible. So, I show the street the securities and ask for bids. First to S&P, then Moody's, Fitches, etc. The winner of my business is the firm that gives my CDO the highest rating. Since CDOs are all the rage, all the rating agencies compete vigorously for the business. And that's how junk sub-prime CDOs become AAA rated securities.
Grt2bOutdoors wrote:They are salesmen paid a commission for writing an opinion where the information is fed to them from the one they are be asked to opine on. Too much self-interest. Have you noticed they seem to only proclaim the issuer dead long after it has become apparent to everyone but them?
I feel like some of these issues of self-dealing could be ameliorated if the ratings companies had to be paid at least partly using the very securites they were evaluating that they would then be required to hold until maturity. The going rate is $150,000 for rating one of these weird CDOs? Fine, your commission is $100,000 cash and a quantity of CDOs with a net present value of $50,000. Your ratings company evaluated 5,000 of these issuances? Then you get to sit on $250,000,000 of AAA/AA+ rated excrement.

The ratings companies will still compete with each other to (artificially) give issuers the best ratings they can up to a certain point (they're not going to cut their own throats, after all). And there will be an opposite pressure to (artificially) depress the ratings as much as they can in order to get a bigger payout. These two countervailing forces will cancel out (because we're playing pretend here) and voila! Honest ratings.

-13

retiredjg
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Re: US Sues S&P

Post by retiredjg » Tue Feb 05, 2013 4:26 pm

13characters wrote:I feel like some of these issues of self-dealing could be ameliorated if the ratings companies had to be paid at least partly using the very securites they were evaluating that they would then be required to hold until maturity.... Then you get to sit on $250,000,000 of AAA/AA+ rated excrement.
Funny. And it might actually work. :happy

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Re: US Sues S&P

Post by TJSI » Tue Feb 05, 2013 4:44 pm

I don't know if crimes were committed or not. Maybe its possible that people with a good education and making good salaries are really, really dumb. Or maybe, they know how to produce the answer management is looking for. It is unlikely that any individual will be held to account for as we all know stuff just happens. Strangely, the only ones to be punished by the regulatory bodies will be the stockholders. So it is the bogleheads that will pay!

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Re: US Sues S&P

Post by Grt2bOutdoors » Tue Feb 05, 2013 4:51 pm

TJSI wrote:I don't know if crimes were committed or not. Maybe its possible that people with a good education and making good salaries are really, really dumb. Or maybe, they know how to produce the answer management is looking for. It is unlikely that any individual will be held to account for as we all know stuff just happens. Strangely, the only ones to be punished by the regulatory bodies will be the stockholders. So it is the bogleheads that will pay!
Actually, the owner - McGraw will pay first, then Warren who holds a good chunk of Moody's, then the rest of society.
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Re: US Sues S&P

Post by Alan S. » Tue Feb 05, 2013 6:06 pm

What immediately comes to mind from this suit is the potential settlement.

"US Govt reaches a settlement with S&P for 500 mil. S&P denies any guilt, however agrees NOT to downgrade US Debt before any other rating agency does so".
The second part of the above will not be released to the public.

So it's a tactical suit by the US. Moody's is next............. :beer

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Re: US Sues S&P

Post by NYBoglehead » Tue Feb 05, 2013 6:10 pm

There are politics, and then there is the obvious. This is payback for the downgrade, pure and simple. If you think otherwise you are incredibly naive.

When is the lawsuit against Fannie and Freddie getting filed? Hundreds of billions of taxpayer dollars later, they are often left out of the conversation about parties deserving of blame.

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Re: US Sues S&P

Post by Grt2bOutdoors » Tue Feb 05, 2013 6:51 pm

NYBoglehead wrote:There are politics, and then there is the obvious. This is payback for the downgrade, pure and simple. If you think otherwise you are incredibly naive.

When is the lawsuit against Fannie and Freddie getting filed? Hundreds of billions of taxpayer dollars later, they are often left out of the conversation about parties deserving of blame.
Can you sue yourself? No. The defacto owner of Fannie and Freddie is the US government. Case closed. Please pay the court costs of $10 on your way out. :wink:
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Re: US Sues S&P

Post by LadyGeek » Tue Feb 05, 2013 8:33 pm

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