Skip to main content

US Govt. files suit against S&P rating agency - Apparently they deliberately withhold information (Really??)

It had to happen someday. In our opinion, rating agencies have this amazing luck particularly in countries like India to be taken seriously without having actually predicted or forewarned anything of significance. Rather, they have spectacularly failed in predicting or forewarning any of the financial disasters which have hit us in the recent past. This is a pointer to anyone looking to create hype. Get big names on board, have good media relation and you are there.


However, if the US govt. is be believed, it appears that these agencies are much more than colorful backgrounds. Rather according to US govt. and at least in the US, it seems that these agencies know it all and actually choose not to disclose the knowledge as favour to their clients. (Ha!)


 US Govt.on 4th Feb, filed suit against S&P rating agency accusing them partly of being partly responsible for the housing loan crash which is the catalyst for the current economic downturn.


The U.S. government wants Standard & Poor's Ratings Services to pay more than $5 billion—roughly what its parent company has earned in the past seven years—for giving its seal of approval to bundles of subprime mortgages that eventually crumbled, costing investors billions and helping sink the economy.


The suit alleges that the largest U.S. rating firm “falsely” represented that crisis-era credit ratings on complex securities “were objective, independent” and “uninfluenced by any conflicts of interest.”


The lawsuit cites dozens of chats between analysts, internal reports and emails, all aimed at showing S&P didn’t actually stand behind the triple-A and other top-notch ratings it issued on hundreds of complex securities backed by home mortgages to U.S. consumers. Many of them are a bit on the lighter side.


S&P, a unit of McGraw-Hill Cos said in a statement Tuesday that “Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. We will vigorously defend S&P against these unwarranted claims.”


Here are the highlights from the suit:


Fees S&P charged for ratings:

For Residential mortgage-backed securities: “S&P typically charged a fee up to $150,000 for each non-prime RMBS it rated.”

For collateralized debt obligations (securities created from pools of risky subprime mortgages and other loans): “S&P typically charged a fee up to $500,000 for each cash CDO it rated and up to $750,000 for each synthetic CDO it rated.”

The growing profits of Asset-backed securities: “At all relevant times, S&P considered structured finance to be a profit center and recognized the ratings business conducted by global CDO and global ABS as growing areas of revenues and profits.”

Early warnings: “By March 2007, S&P knew that the performance of non-prime RMBS was bad and getting worse and that an ongoing review process was likely to result in large-scale negative rating actions for non-prime RMBS.”

“Blow up” in residential homes: “On or about March 1, 2007, Tesher held a meeting of CDO rating analysts that one CDO rating analyst characterized in a contemporaneous instant message to another CDO rating analyst as ‘a meeting to discuss the blow up of the resi[dential] market.’” (The lawsuit says David Tesher was the Managing Director in charge of the Cash CDO group.)

Immediately following Tesher’s meeting, two CDO analysts engaged in the following instant message exchange regarding Tesher’s comments:

Analyst 1: we got the gist of it

Analyst 2: that means market will crash … deals will rush in before they take further loss

Analyst 1: yes

Analyst 2: that means we will see grumpy analyst sand [sic] grumpy bankers and a grumpy [Managing Director in Global CDO ("Executive K")]

Analyst 1: I’m grympy [sic] anyway

Analyst 2: but then we should not push criteria but we give in anyway ahahhahaha

A parody! The analysts wrote a parody!: ” The email stated: With apologies to David Byrne … here’s my version of “Burning Down the House”.

Watch out
Housing market went softer
Cooling down
Strong market is now much weaker
Subprime is boi-ling o-ver
Bringing down the house
Hold tight
CDO biz – has a bother
Hold tight
Leveraged CDOs they were after
Going all the way down, with
Subprime mortgages
Own it
Hey you need a downgrade now
Free-mont
Huge delinquencies hit it now
Two-thousand-and-six-vintage
Bringing down the house.

Don’t respond to that brilliant song!: “Minutes later on or about March 19, 2007, Analyst D sent a follow up email, stating: “For obvious, professional reasons please do not forward this song. If you are interested, I can sing it in your cube ;-).”

Ok, fine, I’ll sing and record: “On or about March 21, 2007, Analyst D circulated another email, attaching a video of him “singing and dancing” the first verse of the song in S&P offices, before an audience of laughing S&P coworkers.”

Comments

Most viewed this month

Amendment of plaint under Order VI Rule 17 of the CPC explained

Cause Title :  Ganesh Prasad vs Rajeshwar Prasad, SLP (C) NO. 28377 OF 2018, Supreme Court Of India Date of Judgment/Order : 14/3/2023 Corum : J. B. Pardiwala, J. Citied:  Revajeetu Builders and Developers v. Narayanaswamy & Sons and Others reported in (2009) 10 SCC 84 North Eastern Railway Administration, Gorakhpur v. Bhagwan Das reported in (2008) 8 SCC 511 P.A. Jayalakshmi v. H. Saradha and Others reported in (2009) 14 SCC 525 B.K. Narayana Pillai v. Parameswaran Pillai and Another reported in (2000) 1 SCC 712 A.K. Gupta and Sons Ltd. v. Damodar Valley Corporation reported in AIR 1967 SC 96 Life Insurance Corporation of India v. Sanjeev Builders Private Limited and Another, Civil Appeal No. 5909 of 2022 dated 01.09.2022 Firm Sriniwas Ram Kumar v. Mahabir Prasad and Others reported in AIR 1951 SC 177 G. Nagamma and Another v. Siromanamma and Another reported in (1996) 2 SCC 25 Praful Manohar Rele v. Krishnabai Narayan Ghosalkar and Others reported in (2014...

Owner of vehicle is not expected to verify the genuineness of the driving license before appointing a driver

Cause Title : Rishi Pal Singh Versus New India Assurance Co. Ltd & Ors., Civil Appeal No. 4919 Of 2022, The Supreme Court Of India Date of Judgment/Order : July 26, 2022 Corum : Hemant Gupta; J., Vikram Nath; J. Background the truck owned by the appellant met with an accident. The owner deposed before the court that before employing the driver, he had taken his driving test and that he was driving the vehicle satisfactorily and  that the driver was employed with him for 3 years before the date of the accident. He produced his driving license. This was reaffirmed by the driver who deposed that the driving license was obtained from the driver and it was issued from Nagaland, but no such license was produced on record. Both the Motor Accident Claims Tribunal and the High Court have held that the owner has alleged that the driver had a driving license from Nagaland but the same was not produced and therefore, the Insurance Company is entitled to recover the awarded amount...

The recovery of vehicles by the financier not an offence - SC

Special Leave Petition (Crl.) No. 8907  of 2009 Anup Sarmah (Petitioner) Vs Bhola Nath Sharma & Ors.(Respondents) The petitioner submitted that  respondents-financer had forcibly taken away the vehicle financed by them and  illegally deprived the petitioner from its lawful possession  and  thus,  committed  a crime. The complaint filed by the petitioner had been  entertained  by  the Judicial Magistrate (Ist Class), Gauhati (Assam) in Complaint Case  No.  608 of 2009, even directing the interim custody of the vehicle (Maruti  Zen)  be given to the petitioner vide order dated  17.3.2009.  The respondent on approaching the Guwahati High  Court against this order, the hon'ble court squashed the criminal  proceedings  pending   before  the  learned Magistrate. After hearing both sides, the Hon'ble Supreme Court decided on 30th...