[Vision2020] The Vice Squad Caught Aiding & Abetting Whores

[Art Deco]

[image: DealBook - A Financial News Service of The New York
Times]<http://dealbook.nytimes.com/>
February 4, 2013, 2:38 pmU.S. Accuses S.&P. of Fraud in Suit on Loan BundlesBy
ANDREW ROSS SORKIN <http://dealbook.nytimes.com/author/andrew-ross-sorkin/>
and MARY WILLIAMS WALSH<http://dealbook.nytimes.com/author/mary-williams-walsh/>

The Justice Department filed civil fraud charges late on Monday against the
nation's largest credit-ratings agency, Standard &
Poor's<http://topics.nytimes.com/top/news/business/companies/standard_and_poors/index.html?inline=nyt-org>,
accusing the firm of inflating the ratings of mortgage investments and
setting them up for a crash when the financial crisis struck.

The suit, filed in federal court in Los Angeles, is the first significant
federal action against the ratings industry, which during the boom years
reaped record profits as it bestowed gilt-edged ratings on complex bundles
of home loans that quickly went sour. The high ratings made many
investments appear safer than they actually were, and are now seen as
having contributed to a crisis that brought the financial system and the
broader economy to its knees.

More than a dozen state prosecutors are expected to join the federal suit,
and the New York attorney general is preparing a separate action. The
Securities
and Exchange Commission<http://topics.nytimes.com/top/reference/timestopics/organizations/s/securities_and_exchange_commission/index.html?inline=nyt-org>has
also been investigating possible wrongdoing at S.& P.

>From September 2004 through October 2007, S.&P. "knowingly and with the
intent to defraud, devised, participated in, and executed a scheme to
defraud investors" in certain mortgage-related securities, according to the
suit filed against the agency and its parent company, McGraw-Hill
Companies<http://dealbook.on.nytimes.com/public/overview?symbol=MHP&inline=nyt-org>.
S.&P. also falsely represented that its ratings "were objective,
independent, uninfluenced by any conflicts of interest," the suit said.

S.& P., first contacted by federal enforcement officials three years ago,
said in a statement Monday in anticipation of the suit that it had acted in
good faith in issuing the ratings.

"A D.O.J. lawsuit would be entirely without factual or legal merit," it
said, adding that its competitors had given exactly the same ratings to all
the securities it believed to be in question.

Settlement talks between S.& P. and the Justice Department broke down in
the last two weeks after prosecutors sought a penalty in excess of $1
billion and insisted that the company admit wrongdoing, several people with
knowledge of the talks said. That amount would wipe out the profits of
McGraw-Hill for an entire year. S.& P. had proposed a settlement of around
$100 million, the people said.

S.& P. also sought a deal that would allow it to neither admit nor deny
guilt; the government pressed for an admission of guilt to at least one
count of fraud, said the people. S.& P. told prosecutors it could not admit
guilt without exposing itself to liability in a multitude of civil cases.

It was unclear whether state and federal authorities were looking at the
other two major ratings agencies, Moody's Investors
Service<http://topics.nytimes.com/top/news/business/companies/moodys_corporation/index.html?inline=nyt-org>and
Fitch<http://topics.nytimes.com/top/news/business/companies/fitch_ratings_inc/index.html?inline=nyt-org>
.

A spokesman for
Moody's<http://dealbook.on.nytimes.com/public/overview?symbol=MCO&inline=nyt-org>declined
to comment. A spokesman for Fitch, Daniel J. Noonan, said the
agency could not comment on an action that appeared to focus on Standard &
Poor's, but added, "we have no reason to believe Fitch is a target of any
such action."

The case against S.& P. focuses on about 40 collateralized debt
obligations<http://topics.nytimes.com/top/reference/timestopics/subjects/c/collateralized-debt-obligations/index.html?inline=nyt-classifier>,
or C.D.O.'s, an exotic type of security made up of bundles of mortgage
bonds, which in turn were composed of individual home loans. The securities
were created at the height of the housing boom. S.& P. was paid fees of
about $13 million for rating them.

Prosecutors have uncovered troves of e-mails written by S.& P. employees,
some of them expressing strong concern about the way such securities were
being rated. The firm gave the government more than 20 million pages of
e-mails as part of its investigation, the people with knowledge of the
process said.

Since the financial crisis in 2008, the ratings agencies' business
practices have been widely criticized and questions have been raised as to
whether independent analysis was corrupted by Wall Street's push for
profits.

A Senate investigation made public in 2010 found that S.& P. and Moody's
used inaccurate rating models from 2004 to 2007 that failed to predict how
high-risk mortgages would perform; allowed competitive pressures to affect
their ratings; and failed to reassess past ratings after improving their
models in 2006.

The companies failed to assign adequate staff to examine exotic
investments, and failed to take mortgage fraud, lax underwriting and
"unsustainable home price appreciation" into account in their models, the
inquiry found.

"Rating agencies continue to create an even bigger monster - the C.D.O.
market," one S.& P. employee wrote in an internal e-mail in December 2006.
"Let's hope we are all wealthy and retired by the time this house of card
falters."

Another S.& P. employee wrote in an instant message the next April,
reproduced in the complaint: "We rate every deal. It could be structured by
cows and we would rate it."

The three major ratings agencies are typically paid by the issuers of the
securities they rate - in this case, the banks that had packaged the
mortgage-backed securities and wanted to market them. The investors were
not involved in the process but depended on the rating agencies'
assessments.

Although the three agencies tend to track one another, each has its own
statistical methods for assessing the likelihood that C.D.O.s and
residential mortgage-backed securities, or R.M.B.S., will default. That has
led to speculation that S.& P. analysts knew their method yielded
unrealistic ratings, but issued the ratings anyway.

"As S.&P. knew, contrary to its representations to the public, S.&P.'s
desire for increased revenue and market share in the RMBS and CDO ratings
markets, and its resulting desire to maintain and enhance its relationships
with issuers that drove its ratings business, improperly influenced S.&P.
to downplay and disregard the true extent of the credit risks," the suit
says.

In its statement on Monday, S.& P. said it had begun stress-testing the
mortgage-backed securities it rated as early as 2005, trying to see how
they would perform in a severe market downturn. S.& P. said it had also
sent out early warning signals, downgrading hundreds of mortgage-backed
securities, starting in 2006. Nor was it the only one to have
underestimated the coming crisis, it said - even the Federal Reserve's open
market committee believed that any problems within the housing sector could
be contained.

The Justice Department, the company said, "would be wrong in contending
that S.& P. ratings were motivated by commercial considerations and not
issued in good faith."

For many years, the ratings agencies have defended themselves successfully
in civil litigation by saying their ratings were independent opinions,
protected by the First Amendment, which guarantees the right to free
speech. Developments in the wake of the financial crisis have raised
questions about the agencies' independence however. For example, one
federal judge, Shira A.
Scheindlin<http://topics.nytimes.com/top/reference/timestopics/people/s/shira_a_scheindlin/index.html?inline=nyt-per>,
ruled in 2009 that the First Amendment did not apply in a lawsuit over
ratings issued by S.& P. and Moody's, because the mortgage-backed
securities at issue had not been offered to the public at large. Judge
Scheindlin also agreed with the plaintiffs, who argued the ratings were not
opinions, but misrepresentations, possibly the result of fraud or
negligence.

The federal action will be the first time a credit-rating agency has been
charged under a 1989 law intended to protect taxpayers from frauds
involving federally insured financial institutions, which since the
financial crisis has been used against a number of federally insured banks,
including Wells
Fargo<http://dealbook.on.nytimes.com/public/overview?symbol=WFC&inline=nyt-org>,
Bank of America<http://dealbook.on.nytimes.com/public/overview?symbol=BAC&inline=nyt-org>and
Citigroup<http://dealbook.on.nytimes.com/public/overview?symbol=C&inline=nyt-org>
.

The government is taking a novel approach by accusing S.& P. of defrauding
a federally insured institution and therefore injuring the taxpayer.

Among others, the compliant includes the demise of Wescorp, a federally
insured credit union in Los Angeles that went bankrupt after investing in
mortgage securities rated by S.& P. Wescorp is included as one example of
the contended fraud, and as a way to bring the case in California. The suit
was filed in Federal District Court for the Central District of California.

*Michael J. de la Merced contributed reporting.*


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://mailman.fsr.com/pipermail/vision2020/attachments/20130205/c54258a6/attachment.html>