S&P Lawsuit: Emails Suggest Concern About Ratings

Created: 02/05/2013 4:05 PM KSTP.com By: Leslie Dyste

The government's case against Standard & Poor's points to documents that authorities say support their accusations - namely, that S&P intentionally gave high marks to risky mortgage investments that eventually collapsed and helped trigger the financial crisis.

S&P disputes the allegations. It says the emails have been taken out of context and don't prove any wrongdoing.

Here are some examples of the government's evidence:

One S&P executive protested in an email: "What do mean by 'market insight' with regard to a proposed criteria change? What does 'rating implication' have to do with the search for truth? Are you implying that we might actually reject or stifle 'superior analytics' for market considerations? ... Does this mean we are to review our proposed criteria changes with investors, issuers and investment bankers? ... (W)e NEVER poll them as to content or acceptability!"

The executive's concerns were ignored, the government said. The S&P contends that under "certain recent regulations," it's required to discuss proposed ratings criteria with market participants.

In July 2005, one analyst wrote of the ratings criteria: "If we are just going to make it up in order to rate deals, then quants are of precious little value," referring to "quantitative analysts" who analyzed risk.

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- In March 2007, one analyst wrote an ode to the subprime mortgage meltdown, emailing colleagues with a takeoff on the song "Burning Down the House" by The Talking Heads.

"Watch out/Housing market went softer/Cooling down/Strong market is now much weaker/Subprime is boi-ling o-ver/Bringing down the house," he wrote.

A few days later, the analyst sent a video of himself singing and dancing that verse in S&P offices, with colleagues laughing.


Analyst 1: btw that deal is ridiculous

Analyst 2: I know right ... model def does not capture half of the ... risk

Analyst 1: We should not be rating it

Analyst 2: we rate every deal .... it could be structured by cows and we would rate it

Analyst 1: but there's a lot of risk associated with it - I personally don't feel comfy signing off as a committee member

The S&P says this analyst had her concerns addressed with the issuer before S&P issued any rating.


S&P analyst: "The fact is, there was a lot of internal pressure in S&P to downgrade lots of deals earlier on before this thing started blowing up. But the leadership was concerned of p(asterisk)ssing off too many clients and jumping the gun ahead of Fitch and Moody's."

Investment banker: "This might shake out a completely different way of doing biz in the industry. I mean come on, we pay you to rate our deals, and the better the rating the more money we make?!?! Whats up with that? How are you possibly supposed to be impartial--"

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