sábado, 9 de febrero de 2013

sábado, febrero 09, 2013


REVIEW & OUTLOOK

February 5, 2013, 7:13 p.m. ET

Payback for a Downgrade?

The feds sue S&P but not Moody's for pre-crisis credit ratings.

 

Now, this is awkward. One agency of the federal government is suing a company for fraud while another agency continues to endorse it.


On Monday in Los Angeles, the Department of Justice sued Standard & Poor's and its parent McGraw-Hill for $5 billion. The claim is that S&P committed civil fraud when it issued high credit ratings on mortgage-related securities prior to the financial crisis of 2008. Sixteen states and the District of Columbia have piled on the suit.


No doubt investors who relied on the opinions of S&P and the other big credit-rating agencies, Moody's and Fitch, suffered terrible losses during the crisis. That was in part because the federal government forced investors to rely on them. Longstanding rules at the Securities and Exchange Commission and other agencies required institutions to hold assets graded highly by these government-approved rating agencies.


And to this day, more than two years after the Dodd-Frank law ordered their repeal, SEC rules still force institutions to follow the advice of these government-anointed credit raters. Therefore the more appropriate defendant for Monday's lawsuit would be the SEC. But as a modest first step before suing a company for $5 billion, shouldn't the government at least stop mandating its products?

 

We've long argued that the government should not endorse any company's opinions about credit risk, which at the end of the day is all a credit rating is—an opinion. And for that reason the government will not have an easy time making a fraud case.


Justice quotes internal emails from S&P personnel suggesting that, in its desire to win rating assignments from the investment banks that created securities, S&P was too generous in handing out high grades. For its part, S&P said in a Tuesday statement, "Claims that we deliberately kept ratings high when we knew they should be lower are simply not true."


If a publisher deliberately misleads, it loses its First Amendment protection. S&P concedes "there was robust internal debate" inside the firm but says it "applied the collective judgment of our committee-based system in good faith."
 
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Bloomberg
U.S. Attorney General Eric Holder.
 
 
Some of the emails in the government suit do look bad, at least as presented in the lawsuit and just like a lot of the rating-agency internal emails that the SEC released in a 2008 report. In fact, some of the same internal S&P messages from that five-year-old report are now reprinted in the new lawsuit.


So why wasn't a federal case made in 2008 or 2009 or 2010 or 2011 or 2012? In the United States it has always been difficult to prosecute publishers of financial opinions for securities fraud. Yes, the SEC has sometimes successfully prosecuted the proprietors of sham newsletters that touted stocks with bogus claims while secretly accepting payments from the companies being hyped.


But everyone already knows the big credit raters get paid to issue their opinions. And courts have often looked askance at broadly using the laws on securities fraud to go after people outside of the business of issuing, underwriting and dealing in securities.


This may be why the SEC, which had been investigating the credit raters, is not part of this week's lawsuit. Justice is instead trying to break new ground by using a 1989 statute intended to prevent bank fraud. Since federally insured financial institutions were among those who relied on credit ratings, argues Justice, S&P can be charged with fraud.


The suit names a specific credit union in California as an alleged victim. In other words, the government that keeps blaming the bankers for the crisis is now painting banks as the victims of rating agencies whose opinions the banks were ordered by the government to follow.


There are other disturbing questions related to the timing and the target of this federal civil prosecution. S&P's attorney Floyd Abrams tells us that "things seemed to rev up in terms of the intensity" of the federal investigation after S&P's historic downgrade of United States credit following Washington's debt-limit fight in 2011.



Meanwhile, a McClatchy Newspapers report says that it was around that time that Moody's, which did not downgrade the government, was dropped from the federal investigation. Ask any investor and he'll likely tell you that Moody's was equally awful in forecasting the mortgage debacle.


Speaking of the debt-limit fight, that's also coincidentally when White House Chief of Staff Jack Lew was aggressively promoting the President's campaign to prevent entitlement reform. Mr. Lew had worked in the heart of Citigroup's subprime investment factory, and the President has not only been willing to forgive and forget. He's even nominated Mr. Lew to become Secretary of the Treasury. But the company that put a shot across the Beltway bow over deficit spending is now the only target of a credit-ratings prosecution.


Why not just take away its government-enforced advantage instead? Both regulators and regulated institutions still yearn for the ability to outsource the tough decisions on credit risk to some certified experts. But it's folly to think that some anointed class can ever be counted on to warn of all potential default dangers.


If prosecutors continue to focus on how the rating process works, they may allow Washingtonians to celebrate downgrade payback, but they won't serve investors or taxpayers. Americans will benefit most when few people care how the rating agencies operate, because their judgments won't be that important.

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