12 Internal Emails Likely to Sway a Jury in the Standard and Poor’s Lawsuit

By Pam Martens: February 5, 2013 

Late last night, the U.S. Department of Justice filed a civil lawsuit in Los Angeles against the credit rating agency, Standard and Poor’s, over alleged deceptive ratings it gave to debt instruments it rated for large investment banks on Wall Street. The suit charges the deceptive ratings were motivated by a desire to gain more business from the Wall Street firms which pay for the ratings. 

Ratings on debt instruments play a pivotal role in helping investors select suitable investments. Ratings of AAA through BBB- are considered investment grade with ratings below that viewed as non-investment grade or junk. And it’s not just individual investors who are impacted by ratings. Banks are legally limited in the amount of non-investment grade securities they can hold and are required to post additional capital when their investment risks rise. When rating agencies assigned AAA ratings to what were effectively junk bonds, banks were able to take on dramatically higher risks without buttressing their capital cushion, leaving them short of capital when the crisis hit. 

Standard and Poor’s issued a detailed statement yesterday vowing to fight the lawsuit and outlining the arguments it will use. One argument goes like this: 

“We have long had policies in place to manage potential conflicts of interest, including a separation of analytic and commercial activities, a ban on analysts from participating in fee negotiations, and de-linking analyst compensation from the volume of securities they rate or the type of ratings they give out. Post-crisis, we further strengthened analytical independence by rotating the analysts assigned to a particular issuer and enhancing analyst training on issuer interactions.” 

That argument is likely to fall on deaf ears if the case goes before a jury. On April 23, 2010, the U.S. Senate’s Permanent Subcommittee on Investigations released 581 pages of exhibits in conjunction with a hearing it held on “Wall Street and the Financial Crisis: The Role of Credit Rating Agencies.” Among the exhibits were 12 excruciatingly incriminating emails from inside Standard and Poor’s. The emails, listed below, showed that worries about losing business if good ratings were not assigned was a perpetual concern inside the company and influenced rating decisions. 

Unfortunately, when Congress permits a system where Wall Street gets to “pay to rate,” and can shop around for the rating agency willing to give the highest rating to its deals, it’s preposterously naïve to expect any other outcome other than corruption. One would have thought that the first thing Congress would have done after disclosing its trove of evidence would be to pass legislation to end the ability of the issuer to pay for the rating. But the status quo remains, furthering damping investor confidence in Wall Street, the ratings agencies and Congress.

Emails released by Senate Permanent Subcommittee on Investigations:

Standard & Poor’s internal email, dated May 2004, re: Competition with Moody’s (We just lost a huge Mizuho RMBS deal to Moody’s …. * * * Losing one or even several deals due to criteria issues, but this is so significant that it could have an impact in the future deals.). 

Standard & Poor’s internal email, dated August 2004, re: SF CIA: CDO methodology invokes reaction (We are meeting with your group this week to discuss adjusting criteria for rating CDOs of real estate assets this week because of the ongoing threat of losing deals. *** Lose the CDO and lose the base business – a self reinforcing loop.). 

Standard & Poor’s internal email, dated March 2005, re: LEVELS 5.6(c) (Version 6.0 could’ve been released months ago and resources assigned elsewhere if we didn’t have to massage the sub-prime and Alt-A numbers to preserve market share.  

Standard & Poor’s internal email, dated June 2005, re: Privileged Criteria Deliberations: CWHEQ 2005-C (Why these questions come up every month is obvious – issuers don’t like the outcome. However, the right thing to do is to educate all the issuers and bankers and make it clear that these are the criteria and that they are not-negotiable. If this is clearly communicated to all then there should be no monthly questions. *** Screwing with criteria to “get the deal” is putting the entire S&P franchise at risk – it’s a bad idea.). 

Standard & Poor’s internal email, dated February 2006, re: comstock (If our current structure, which we have been marketing to investors and the mgr, (and which we have been doing prior to the release of the beta cash flow assumptions) doesn’t work under the new assumptions, this will not be good. Happy to comply, if we pass, but will ask for an exception if we fail…). 

Standard & Poor’s internal email, dated May 2006, re: ***Privileged & Confidential Committee Deliberations **** – Madaket Funding (I submit for your consideration the banker’s argument to waive the one failing run.). 

Standard & Poor’s internal email, dated May 2006, re: Broadwick Funding (It was a known flaw not only in that particular ABACUS trade, but in pretty much all ABACUS trades ….). 

Standard & Poor’s internal email, dated May 2005, re: Adirondack CDO (…this is exactly the kind of backroom decision-making that leads to inconsistent criteria, confused analysts, and pissed-off clients.). 

Standard & Poor’s internal email, dated May 2006, re: Confidential – Criteria Changes in LEVELS 5.7 (We certainly did intend to do anything to bump us off a significant amount of deals. *** [H]eard your ratings could be 5 notches bank of moddys [sic] equivalent. [G]onna kill your resi biz.). 

 Standard & Poor’s internal email, June 2006, re: question on impacts to CDOs (We assume this scenario to be negative for the corporate business because Moody’s will be giving out higher ratings on secured loans so issuers will be less likely to ask for an S&P rating on the issue.). 

Standard & Poor’s internal email, dated August 2006, re: Can you call me? Have left you numerous messages (How many millions does Morgan Stanley pay us in the greater scheme of things? How many times have I accommodated you on tight deals?). 

Standard & Poor’s internal email, dated August 2006, re: Loss severity vs gross/net proceeds (They’ve become so beholden to their top issuers for revenue they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation ….).

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