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I know this topic is a few days old, but it is still fresh in my mind. As everyone has seen, the US is now suing S&P

The U.S. government is expected to file civil charges against Standard & Poor's Ratings Services, alleging that it improperly gave high ratings to mortgage debt that later plunged in value and helped fuel the 2008 financial crisis.
The charges would mark the first enforcement action the government has taken against a major rating agency involving the worst financial crisis since the Great Depression.
S&P said Monday that the Justice Department had informed the rating agency that it intends to file a civil lawsuit focusing on S&P's ratings of mortgage debt in 2007.

Fine. You've sued all the banks and about everyone else, I guess it is time to move on to the ratings agencies as they sure as hell dropped the ball on this. I'm still waiting on them to sue pension fund managers, hedge fund managers etc as well but hey, why not go for the obvious scapegoats. Then I read this.

A federal lawsuit would "disregard" the fact that S&P reviewed the same data on risky mortgages as U.S. government officials, who said publicly in 2007 that the problems in the subprime mortgage market appeared to be limited, the company said in a statement.

Are. You. Kidding. Me. Really? This is what it has come to? We aren't even glossing over the fact we are trying to scapegoat them, we are actually coming out and saying it in plain sight. Yeah, the geniuses running the country, the Fed and the Treasury all missed it with your same data but yet we are still going to civilly sue you over it. That's just priceless.

Look, I'm not trying to say that the ratings agencies weren't derelict or didn't do a shitty job but I still maintain that it is the responsibility of the clowns who buy the stuff, the end consumers of it, to do their due diligence. To come back and sue over this is absolutely ridiculous. Thrown in the fact that the government is only suing the one ratings agency that had the stones to downgrade them (egan jones not-withstanding). This is just obnoxious. Anyway, that's enough of that.

Also, an interesting article for those interested in the tax implications of getting divorced courtesy of the journal.

What do you guys think? Are you just jaded of the entire thing, or is this a rightful lawsuit towards those who actually failed us during the crisis?

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Comments (20)

  • Bearearns's picture

    Lots of people missed and there were conflict of interests but at end of day it is the buyer who is responsible. It is why there is buy and sell side. Like if I bought Apple based on some analysts recommendation for it to hit $1,000 can i sue them for now having me 30% in the red? It is the exact same thing. That said S&P has had a lto of recent screwups as evidence by them pulling CMBS ratings etc. Targeted for wrong reasons by public.

  • UFOinsider's picture

    Addinator:
    S&P reviewed the same data on risky mortgages as U.S. government officials, who

    ....were relying on the judgement of S&P for guidance. S&P then took this approval as a sign of their own credibility, and a self fulfilling circular reference became untethered from reality.

    The way I see things, responsibility for the financial crisis is everyone's. The banks overleveraging on low quality loans, consumers taking on too much debt, the government juicing the system with low interest rates and a crusade to turn everyone into a homeowner, builders overbuilding, speculators....literally everyone. The last government administration will be judged rather harshly for using low interest rates to juice the housing market to keep the economy roaring after 911 and the dot com bust. The best we're going to get as far as punishment for the government is a different administration: this one. You can judge if that's sufficient or not for yourself.

    The credit ratings agencies are the ones that were supposed to know better though. I lay the harshest criticism on them. I'm glad they're finally answering for their actions, it seems they took their duties for granted, as well as their privelages.

    BTW: told y'all last year that the gov't would crucify S&P for fucking with them.

    Get busy living

  • In reply to Bearearns
    UFOinsider's picture

    Bearearns:
    at end of day it is the buyer who is responsible

    I'm under the impression that everyone is required to be responsible. Due diligence is one thing (not saying it was or wasn't done...) but sniffing out fraud is another. If an error is made in disclosure it's one thing, but concealing fraud will take precedence as an offence compared to negligence on the part of the recieving party: in simple language, just because a buyer didn't do enough good due diligence doesn't excuse fraud.

    The dangerous part of this is that S&P's freedom of speech is not going to be unchallenged anymore, and they will likely be held to more stingent account, meaning they are going to become much more cautious with their appraisals. Maybe a good thing, but it's not going to help the economy. Something like this should have been done 3 or 4 years ago, not now, it's just going to keep adding drag to what slow recover there is, and this is a blunder on the Obama adminstration's part.

    In reality, the gov't is going to have a VERY hard time proving that S&P did anything fraudulent because I don't think most staff actually were committing fraud: they just let their standards slip as they lost sight of the big picture. More likely, the gov't will demand a different compensation arrangement for the ratings agencies when they realize that the problem wasn't one particular firm, it was systemic. I still give the odds at 80% that the gov't will extort some money out of S&P, but I find it unlikely that they're going to find the smoking gun they're looking for.

    Get busy living

  • In reply to UFOinsider
    Bearearns's picture

    UFOinsider:
    Bearearns:
    at end of day it is the buyer who is responsible

    I'm under the impression that everyone is required to be responsible. Due diligence is one thing (not saying it was or wasn't done...) but sniffing out fraud is another. If an error is made in disclosure it's one thing, but concealing fraud will take precedence as an offence compared to negligence on the part of the recieving party: in simple language, just because a buyer didn't do enough good due diligence doesn't excuse fraud.

    The dangerous part of this is that S&P's freedom of speech is not going to be unchallenged anymore, and they will likely be held to more stingent account, meaning they are going to become much more cautious with their appraisals. Maybe a good thing, but it's not going to help the economy. Something like this should have been done 3 or 4 years ago, not now, it's just going to keep adding drag to what slow recover there is, and this is a blunder on the Obama adminstration's part.

    In reality, the gov't is going to have a VERY hard time proving that S&P did anything fraudulent because I don't think most staff actually were committing fraud: they just let their standards slip as they lost sight of the big picture. More likely, the gov't will demand a different compensation arrangement for the ratings agencies when they realize that the problem wasn't one particular firm, it was systemic. I still give the odds at 80% that the gov't will extort some money out of S&P, but I find it unlikely that they're going to find the smoking gun they're looking for.

    They will search emails and find something likely, but not enough maybe....

    I say it is the buyer who is responsible because it is their mandates that change things. If they want change they can easily get it, but if they dont they do nothing. The game wont change unless the buyer changes it. The "broken" model wont change unless buyers pay for ratings to get rid of conflict of interest. It wont change until they open their own mandates for all rating agencies allowing more competition in the space. The sad thing is that it won't ever change unless industry becomes nationalized after another blow up or somehow deals get rotated between agencies with nobody getting more or less (essentially destroying capitalism in the area).

  • In reply to Bearearns
    UFOinsider's picture

    Bearearns:
    The "broken" model wont change unless buyers pay for ratings to get rid of conflict of interest.

    This is pretty fucking brilliant, I wonder why ratings agencies haven't done this yet?

    Get busy living

  • In reply to ghandi
    UFOinsider's picture

    ghandi:
    UFOinsider:
    Bearearns:
    The "broken" model wont change unless buyers pay for ratings to get rid of conflict of interest.

    This is pretty fucking brilliant, I wonder why ratings agencies haven't done this yet?

    thats dumb as shit, you think that never came across S&P's mind? think about the tug of war on both sides they have to deal with given your business model, it wouldn't take a financial crisis for people to see they are really just a 2.4 billion loaded dice


    S&P is doing research on institutions, why are the results of their work free?

    Get busy living

  • In reply to ghandi
    Bearearns's picture

    ghandi:
    UFOinsider:
    Bearearns:
    The "broken" model wont change unless buyers pay for ratings to get rid of conflict of interest.

    This is pretty fucking brilliant, I wonder why ratings agencies haven't done this yet?

    thats dumb as shit, you think that never came across S&P's mind? think about the tug of war on both sides they have to deal with given your business model, it wouldn't take a financial crisis for people to see they are really just a 2.4 billion loaded dice

    Investors pay model doesnt work because investors wont pay for it (Structured guys are cheaper than equity I guess). If they wont pay you cant run a business without receiving money and investors aren't paying out of pocket

  • In reply to UFOinsider
    Bearearns's picture

    UFOinsider:
    Bearearns:
    The "broken" model wont change unless buyers pay for ratings to get rid of conflict of interest.

    This is pretty fucking brilliant, I wonder why ratings agencies haven't done this yet?

    Not a good business model because investors wont pay for ratings. Rating Agencies have tried and failed because investors wont pay. You cant run business without revenue.

  • orangejulius's picture

    rating agencies only exist because lazy institutional investors are not willing to do the credit analysis. every bank has their own credit department and rating agencies are ignored. if institutional investors would spend a few more minutes to perform due diligence on what they're buying this would eliminate the need for rating agencies.

  • In reply to orangejulius
    Bearearns's picture

    orangejulius:
    rating agencies only exist because lazy institutional investors are not willing to do the credit analysis. every bank has their own credit department and rating agencies are ignored. if institutional investors would spend a few more minutes to perform due diligence on what they're buying this would eliminate the need for rating agencies.

    You realize they exist so that deals can be priced and sold to investors....... You think investors would buy stuff from the issuers if they put the value of the deals. Hey by the way this deal is all AAA and so is everything else I issue. Jesus that would be horrible. They are there to help with the initial pricing of the deal and provide infomation on deal.

    That is like having an firm IPOing and determining their own market cap and nobody gets to do any dilligence on what they say their market cap should be

  • In reply to Bearearns
    UFOinsider's picture

    Based on this discussion so far, I gather that some possible options are
    1. Nationalizing ratings agencies, or creating gov't agencies that perform the function
    2. Eliminating ratings agencies entirely and pushing the whole task onto institutional investors
    3. Charging for results

    These options are quesionable at best. The whole "let the markets come up with a solution" won't fly given that the gov't put up a trillion+ of its own cash and isn't going to let this die. Does the ratings agencies being audited by the gov't seem feasible? Realistically, they're supposed to perform an important function and they fucked up when that function actually mattered most. Anyone can rate J&J at AAA, that's a no brainer and my goldfish guessed that one right, but rating (hyperbole) Magnetar's NuclearHolocaustZtrancheBuySideGenocide at AAA seems kind of asinine. Either they gave the ratings banks wanted to turn a buck or they just guestimated wrong, but either way they suck at life.

    Any other ideas?

    Sorry to harp on this, this is very interesting to me and I really do appreciate every argument/fact. From my point of view the ratings agencies were supposed to be the gatekeepers. Getting something wrong by a few points is part of life, but saying they didn't realize an entire segment of a market was a decade long bubble is kind of like saying "OMG LOL I never would have guessed that Lance Armstrong was on the drugs!?" I don't buy it.

    And much more to the point, I'm curious to see if we can, between us all, figure out what's going to happen ahead of time.

    Get busy living

  • In reply to Bearearns
    orangejulius's picture

    Bearearns:
    orangejulius:
    rating agencies only exist because lazy institutional investors are not willing to do the credit analysis. every bank has their own credit department and rating agencies are ignored. if institutional investors would spend a few more minutes to perform due diligence on what they're buying this would eliminate the need for rating agencies.

    You realize they exist so that deals can be priced and sold to investors....... You think investors would buy stuff from the issuers if they put the value of the deals. Hey by the way this deal is all AAA and so is everything else I issue. Jesus that would be horrible. They are there to help with the initial pricing of the deal and provide infomation on deal.

    That is like having an firm IPOing and determining their own market cap and nobody gets to do any dilligence on what they say their market cap should be

    as someone who worked at a rating agency and now works on the sell side i can tell you that rating agencies have very little to no impact on structuring and pricing. banks have their own internal credit teams and they will structure and price using internal ratings accordingly.

  • In reply to orangejulius
    Bearearns's picture

    orangejulius:
    Bearearns:
    orangejulius:
    rating agencies only exist because lazy institutional investors are not willing to do the credit analysis. every bank has their own credit department and rating agencies are ignored. if institutional investors would spend a few more minutes to perform due diligence on what they're buying this would eliminate the need for rating agencies.

    You realize they exist so that deals can be priced and sold to investors....... You think investors would buy stuff from the issuers if they put the value of the deals. Hey by the way this deal is all AAA and so is everything else I issue. Jesus that would be horrible. They are there to help with the initial pricing of the deal and provide infomation on deal.

    That is like having an firm IPOing and determining their own market cap and nobody gets to do any dilligence on what they say their market cap should be

    as someone who worked at a rating agency and now works on the sell side i can tell you that rating agencies have very little to no impact on structuring and pricing. banks have their own internal credit teams and they will structure and price using internal ratings accordingly.

    Then you must have been oblivious to the process. The so called feedback from the rating agency to the bank determines how where the deal gets priced and structured. How do you think the different parties that make up the pool get paid? That is why rating agency valuations matter and then gets priced back into the whole process to determine what each respective party of pool gets.

    Yes banks do have internal credit teams etc, but if they cant get rating agencies to agree on how they want to price it doesnt happen. If rating agencies agree (sign off on levels)... (which is why there are sometimes split ratings between rating agencies) then they go ahead with the price structure. If a bank says lowest part of deal gets tranched at AA and rating agencies say BBB, it doesnt get done all at AA because every investor would look at the bank and say WTF I am not buying that.

    I will agree that banks control the process etc. but it only happens because rating agencies agree. If rating agencies disagree then it does not happen because it raises red flags to investors etcs whom banks are trying to sell deal to

  • In reply to Bearearns
    orangejulius's picture

    Bearearns:
    orangejulius:
    Bearearns:
    orangejulius:
    rating agencies only exist because lazy institutional investors are not willing to do the credit analysis. every bank has their own credit department and rating agencies are ignored. if institutional investors would spend a few more minutes to perform due diligence on what they're buying this would eliminate the need for rating agencies.

    You realize they exist so that deals can be priced and sold to investors....... You think investors would buy stuff from the issuers if they put the value of the deals. Hey by the way this deal is all AAA and so is everything else I issue. Jesus that would be horrible. They are there to help with the initial pricing of the deal and provide infomation on deal.

    That is like having an firm IPOing and determining their own market cap and nobody gets to do any dilligence on what they say their market cap should be

    as someone who worked at a rating agency and now works on the sell side i can tell you that rating agencies have very little to no impact on structuring and pricing. banks have their own internal credit teams and they will structure and price using internal ratings accordingly.

    Then you must have been oblivious to the process. The so called feedback from the rating agency to the bank determines how where the deal gets priced and structured. How do you think the different parties that make up the pool get paid? That is why rating agency valuations matter and then gets priced back into the whole process to determine what each respective party of pool gets.

    Yes banks do have internal credit teams etc, but if they cant get rating agencies to agree on how they want to price it doesnt happen. If rating agencies agree (sign off on levels)... (which is why there are sometimes split ratings between rating agencies) then they go ahead with the price structure. If a bank says lowest part of deal gets tranched at AA and rating agencies say BBB, it doesnt get done all at AA because every investor would look at the bank and say WTF I am not buying that.

    I will agree that banks control the process etc. but it only happens because rating agencies agree. If rating agencies disagree then it does not happen because it raises red flags to investors etcs whom banks are trying to sell deal to

    You can continue telling urself that ur job working at a rating agency (which based off your defensiveness seems like the case) is valuable. But in reality it is not and u will remain the ridicule of the entire finance community. Good luck.

  • In reply to orangejulius
    Bearearns's picture

    orangejulius:
    Bearearns:
    orangejulius:
    Bearearns:
    orangejulius:
    rating agencies only exist because lazy institutional investors are not willing to do the credit analysis. every bank has their own credit department and rating agencies are ignored. if institutional investors would spend a few more minutes to perform due diligence on what they're buying this would eliminate the need for rating agencies.

    You realize they exist so that deals can be priced and sold to investors....... You think investors would buy stuff from the issuers if they put the value of the deals. Hey by the way this deal is all AAA and so is everything else I issue. Jesus that would be horrible. They are there to help with the initial pricing of the deal and provide infomation on deal.

    That is like having an firm IPOing and determining their own market cap and nobody gets to do any dilligence on what they say their market cap should be

    as someone who worked at a rating agency and now works on the sell side i can tell you that rating agencies have very little to no impact on structuring and pricing. banks have their own internal credit teams and they will structure and price using internal ratings accordingly.

    Then you must have been oblivious to the process. The so called feedback from the rating agency to the bank determines how where the deal gets priced and structured. How do you think the different parties that make up the pool get paid? That is why rating agency valuations matter and then gets priced back into the whole process to determine what each respective party of pool gets.

    Yes banks do have internal credit teams etc, but if they cant get rating agencies to agree on how they want to price it doesnt happen. If rating agencies agree (sign off on levels)... (which is why there are sometimes split ratings between rating agencies) then they go ahead with the price structure. If a bank says lowest part of deal gets tranched at AA and rating agencies say BBB, it doesnt get done all at AA because every investor would look at the bank and say WTF I am not buying that.

    I will agree that banks control the process etc. but it only happens because rating agencies agree. If rating agencies disagree then it does not happen because it raises red flags to investors etcs whom banks are trying to sell deal to

    You can continue telling urself that ur job working at a rating agency (which based off your defensiveness seems like the case) is valuable. But in reality it is not and u will remain the ridicule of the entire finance community. Good luck.

    I work for neither a bank nor a rating agency although I did use to work for the former. It is no secret that the entire business relationship between a bank and rating agency is full of conflict of interests that make you take three looks and then a fourth to say how is it possible. I am just stating facts. The fact of the matter is that if humans didnt learn their lesson from 2007, they are certainly a ticking time bomb to learn the same lesson again.

  • In reply to Bearearns
    UFOinsider's picture

    Bearearns:
    if humans didnt learn their lesson from 2007, they are certainly a ticking time bomb to learn the same lesson again.

    ...and this time I'll be waiting to cash in on it.

    Serious theoretical question though: what's the best systemic fix to ratings agencies' deficiencies?

    Get busy living

  • In reply to UFOinsider
    Bearearns's picture

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