The U.S. government is suing Standard and Poor's (and parent McGraw-Hill) for $5bn to cover losses sustained by state pension funds, federally insured banks and credit unions, claiming that the rating unit intentionally propped-up ratings of mortgage-backed deals, which crashed once the financial crisis hit.
Standard and Poor's has denied the claims, but there's some fairly damaging emails, instant messaging - and even a video - which could cause problems down the line. Standard and Poor's say that the following has been selectively released by the Department of Justice, and doesn't represent the full picture.
The New York Times reports that by March 2007, the complaint says, S.&P. knew that certain mortgage securities were doing poorly and might have to have their ratings revised. That month, an analyst who had taken a close look at 2006-vintage securities sent an e-mail to some colleagues with the subject line Burning down the house — Talking Heads, according to the complaint. The e-mail reproduced in the complaint read:
'With apologies to David Byrne…here’s my version of “Burning Down the House“.
Housing market went softer
Strong market is now much weaker
Subprime is boi-ling o-ver
Bringing down the house
Hold tight CDO biz — has a bother
Leveraged CDOs they were after
Going — all the way down, with
Hey you need a downgrade now
Free-mont Huge delinquencies
Hit it now
Bringing down the house'.
Minutes later, the complaint says, the analyst sent a follow-up e-mail: 'For obvious, professional reasons please do not forward this song. If you are interested, I can sing it in your cube ;-).'
Bloomberg has reported that the U.S. government said that the analyst later sent a video of himself singing and dancing the first verse 'before an audience of laughing S&P co-workers'.
Other highlights (or lowlights) include:
An instant message which said: 'We rate every deal. It could be structured by cows and we would rate it'.
Reuters reports that in 2006, S&P loosened assumptions on its ratings of collateralized debt obligations, which one of the firm's analysts described as creating a loophole big enough to drive a Mack truck through.
Asked who came up with the idea, the analyst referred to a couple of colleagues and said: 'I am interested to see if any career consequences occur. Does company care about deal volume or sound credit standards ?'
By July 5, 2007, as the credit crisis began taking hold, a new S&P structured finance analyst told an investment banking client: '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*ssing off too many clients and jumping the gun ahead of Fitch and Moody's'.
Six days later, the analyst alluded to a climactic scheme in the movie Trading Places by adding: 'You should see how it is here right now. It's like a friggin trading floor. 'Downgrade, Mortimer, downgrade!!!'
image: © steenslag