The very belated Federal civil suit against Standard & Poors is based on one very specific deal, with an extremely egregious email trail. Looking at the entirety of the crisis, the Credit Rating Agencies were major players. Standard & Poor’s and Moody’s as well as the much smaller Fitch ratings agencies all appear to be culpable for similar frauds…
1. Business Model: They shifted their business model from an investor-pays-for-research to an underwriter-pays-for-ratings. Normally, any company is free to change their business model. But the major ratings are not just any business — these firms were all “Nationally Recognized Statistical Rating Organization” (NRSRO) — which the SEC allows other firms to rely on for regulatory purposes.
2. Ratings that were fraudulent: There is overwhelming proof that the ratings agencies knew what they were cranking out misrepresented the quality of the underlying bundles of paper. They did this because they were paid by the underwriters to generate an investment grade rating. THAT WAS THE SOLE PURPOSE OF THE RATING AGENCIES. Hence, why they were called the great enablers of the credit crisis.
3. Ratings Based on Bad Assumptions: Home prices never go down is the excuse we have heard — except there are many examples that disprove this. The data set allowed the rating agencies models to reach a A rating — build in the possibility of lower home prices, and you cannot get the same ratings out of subprime mortgage securitizations. S&P may want to plead Stupidity, and I suspect the prosecution will defer — but stupidity does not present a shield to civil liability.
4. Ratings that were not rated: There are examples of securitized bundles of mortgages that were unreviewed, unanalyzed — and AAA rated.
There are more examples, but let me simplify this for you: In an ultra low rate environment, Fixed income managers were under tremendous pressure to find yield. Their solution was to buy paper that was rated investment grade by the major credit ratings agencies EVEN THOUGH THEY KNEW OR SHOULD HAVE KNOWN IT WAS NOT. The agencies rated junk paper as AAA not because they believed it, but because they were paid to do so…
If Arthur Anderson received the ultimate penalty for their part in the Enron and other fraud, I see no reason why Moody’s and S&P don’t suffer the same fate — plus criminal prosecution for senior management.
Let’s start with the finance and banking communities. Outside of those directly in bed with Pentagon pimps, they are the biggest crooks affecting our daily lives. Fines that look big to ordinary folks who work for a living are an OK start. It’s time for some of these crooks to share cells with their peers from the ranks of car-jackers, armed robbery and other street thugs.