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The Crucial Weakness of the Case Against S&P

Posted at 8 a.m. on Feb. 6

The Department of Justice filed a civil case against credit rating agency S&P for its role in the financial crisis, but John Carney points out a major weakness of the case: “the government’s assumption that there was something wrong with the credit rating agency changing its standards to win more business.”

“This idea that issuers recklessly demanded high ratings for even the worst bundles of mortgage-related assets is deeply ingrained in public discussions about the financial crisis… It has not, however, ever been established in any legal arena. Which means that the Justice Department will have to prove that issuers demanded fraudulently high ratings.”

“There’s not much by way of evidence in the Department of Justice’s complaint that issuers demanded fraudulently high ratings… To get an idea of how hard this will be to prove just imagine who could be called upon to provide evidence.”

The Financial Times reports that DOJ has calculated that S&P defrauded investors out of at least $5 billion.

2comments
Financial Markets, Judiciary

Headlines

  • MVH1

    In these kinds of unspoken understandings, of course there’s no hard evidence created. Wink-wink deals are usually proposed in long, round-about ways, like discussions of what-ifs and suggestions but never a hard, cold request. It would be hard to convince most people, whether there’s explicit evidence or not, that S&P didn’t compromise to please their clients. Anybody who relies on someone else for their business is vulnerable to this kind of thing. They deserve a lot of criticism and some kind of punishment for either their part in this disaster or hiring really stupid, naive people to do serious work investors depended on being correct and reflective of reality. But then lawyers are part of this whole sleight of hand way of operating as well. The foxes are guarding every hen house.

  • http://www.facebook.com/mac.farr Mac Farr

    They’re all a bunch of crooks, and not very good ones at that. Moody’s and Fitch should be charged as well. The problem with these ratings agencies is that they’re paid by whoever is issuing the securities in question. Would you go to a used car lot, and ask their, and only their, mechanic if what you’re about to buy is a lemon and actually believe it? Same principle applies here, and Wall Street fought tooth and nail, successfully, to perpetuate their ability to rate their own bonds. So, we’re left with a system that’s churning out asset-backed securities that don’t have accurate ratings, and thus their risk (and ultimate likelihood that these things will detonate our financial system) is still pretty high. Only this time around, it’s student loans (of which nearly 20% are either delinquent or outright default) instead of mortgages. American didn’t learn. Instead, we elected a bunch of Tea Party morons and cowardly Democrats who succumbed to the shiny trinkets (campaign donations) that the Wall Street kleptocracy spewed onto them.

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