financial collapse Rule: Ask The Question

Financial Prosecutions: S&P AAA Ratings Lawsuit

Ever since the financial collapse four years ago, the news has sporadically covered the question of why there have been no major prosecutions.  The coverage and the legal system itself have seemed to repeatedly hit a wall over the problem of ‘how provable’ the financial infractions are.

One contributor to the financial meltdown, the AAA ratings that Standard and Poors gave to high risk debt instruments known as CDO’s (collateralized debt obligations), is about to serve as the first big legal test for the ratings agencies and their role in the debacle.

The Justice Department brought a civil suit against S&P, and is considering one against Moodys, for giving the highest rating possible- AAA, to CDO’s that were based on toxic mortgage backed securities (MBS’s).  Investors, including federally insured financial institutions, relied on the ratings and lost billions of dollars when the CDO’s went south, triggering a chain reaction of losses bringing down the financial system and the economy with it.

The lawsuit for fraud includes incriminating emails from S&P managers and analysts that indicate they knew how risky the securities were, yet gave them the top rating anyway, at least in part because they didn’t want to loose income and market share for their agency.

A few choice quotes from those emails: “Let’s hope we are all wealthy and retired by the time this house of card falters.”  “We rate every deal. It could be structured by cows and we would rate it.”

Yet, even with a mountain of emails and testimony, many still think it will be difficult to prove.  Check out this incredible CNBC discussion on the slippery slope of legal intent and proving fraud.   (If no video below, click here.)


Sound familiar? There’s always some glitch, loophole or technicality of the law that allows these transgressions to slip through.  But that’s only part of this quagmire.

It turns out that cases like this rely in part on regulatory agencies, who, if they don’t do their job to begin with (which many think they didn’t), will not have the documentation needed for prosecutions. This NYT piece addresses that and much more in one of the most comprehensive and readable articles I’ve seen.

And then there’s is the conflict of interest issue- the ratings agencies get paid for their ratings!  Sen. Al Franken has renewed his commitment to fixing that after his proposed amendment to the Wall Street Reform bill stalled two years ago.

But back to the S&P fraud suit.  Let’s connect the dots:

The emails show that, internally, the risks were known.
Those risks were communicated up the chain of management.
Top AAA ratings were given anyway.
The securities collapsed.

All this tunnelling in on ‘legal intent’ and the narrow focus on fraud seems to me (not that I have any legal expertise) to be a case of not seeing the forest for the trees.

So to the media I say–

Ask the Question: Why can’t the ratings agencies be sued for financial negligence instead of fraud?

And while we’re at it, tackle these questions too:

Why is so little being done to address the conflict of interest problem in ratings agencies?
Why have no officials in the regulatory agencies been fired?

If you don’t ask, we’ll never advance the dialog beyond this chronic ‘can fraud be proved?’ limbo we’re in.

Finally, check out The Daily Shows take on CNBC’s response to the Franken amendment in this former [intlink id=”110″ type=”page” anchor=”VoW_Asst_DailyShow”]Video of the Week[/intlink].

By mimiv

I was a software engineer in hi-tech for 23 years, now writing- this blog.