S&P downgrades US debt; Justice Department retaliates, settles for $1.37B

[First]

In principle I'd agree, but when the bets are this high it's far beyond hedging. Given that S&P (among others) helped create and rate these mortgage-based securities, hard for me to see how that could not be fraud. If you rate securities as AAA and then structure your own investments so that you lose your ass if they perform like AAA securities but make out like a bandit if they perform like junk bonds, you lose plausible deniability.

I think these two posts capture the bankers' part of the crash. Bad enough that the GSEs dropped sane requirements to buy loans, but banks and mortgage companies could have continued their customary business practices. The GSEs never mandated that such "outdated metrics" as employment, income and credit history NOT be verified, they simply stopped making that a requirement to purchase them. Had banks and mortgage companies continued their customary business practices, there would have been no crash, period. Instead they used their newfound freedom to make loans that patently could not be paid back, loans to people who almost definitely wouldn't pay them back, loans far in excess of true value. They weren't forced to do this, they were merely allowed, by the GSEs and by the regulators. Then they doubled down and bundled these mortgages as AAA securities, allowing them to sell not only to the GSEs but also to investors. Then they tripled down and bet on those AAA securities to fail. That's far beyond normal, healthy greed and well into fraud, and here I agree with Eskimospy that the federal government should be going after criminal indictments on individuals. Companies don't decide to break laws, people do, and those people need to be held accountable. I understand that it's difficult to prove such cases and that ethically it's not black and white since Congress, the White House (via regulators), and the GSEs were also complicit. But there should be enough pieces (like this case) that individually ARE black and white to send a clear signal that this behavior is not okay.

I blame us all for the crash - homeowners taking out loans they can't repay, the GSEs for dropping sane borrowing guidelines, Congress for setting unreachable goals and not addressing the problem when it became clear, Bush for rightfully pushing for a legislative solution while wrongfully ignoring what he could have done via Executive Order and Presidential Directive to the regulators, the regulators for not raising Holy Hell at what was being done. But nobody has nearly as much blame as the banks (and mortgage companies) who willingly made loans that could not be paid back, inflated home values to make more money selling the mortgages, bundled and sold near-worthless mortgages as AAA securities, and then bet against them.

I agree with some of this, but will say that I'm not aware of Fannie underwriters telling private banks that they could ignore documentation, asset/job verification, signatures, etc. Also, the FHA insured a lot of non-conforming risky loans, but the extent of that risk was certainly not made 100% transparent by the primary mortgage lending culprits. That's just fraud, and obviously while regulators clearly share culpability, the bankers that actually took the steps to peddle these loans to the gov't in the secondary mortgage markets are clearly primarily at fault.

 

[zephyrprime]

I'm also outraged. $1.6 billion seems awfully low considering the amount of fraud S&P was engaged in.

One of the best things in recent years has been Obama's aggressive crackdown on the banks. He still needs to step it up further though.

That's how it always goes. They just get a slap on the wrist. Obama's not going to do anything about it because he's a key enabler in the crime. Why do you think any politician gets any campaign donations.

 

[Darwin333]

Maybe if an industry wanted to be trusted more it should commit fraud on a slightly less massive scale.

And Eskimospy is being really nice when he says that. It's akin to saying "If Hitler didn't want to be portrayed as such a historical asshole maybe he should have killed jews on a slightly less massive scale".

 

[Darwin333]

LOL, government commits bigger fraud on a nearly daily basis than banks could possibly conceive of. Talk about picking the wrong horse in the race, people rate HIV more favorably than Congress.

As far as S&P and other ratings agencies committing "fraud," I'm unsure what standard you expect to realistically hold them to since the entire financial market basically imploded. When even commercial paper and money markets lose liquidity and stop trading you're honestly complaining about how a CDO tranche didn't perform up to it's billed rating? That's like levying a fine on a wallpaper maker because it's product wasn't as waterproof as thought, as demonstrated by how it performed in a rainstorm after the roof of the house was ripped off by a tornado and the walls left exposed to the elements for a week.

Oh cut the crap, what the banksters did was basically take a dog turd, dig it in Godiva and sold it as pure Godiva chocolate. The rating agencies stated that they tasted and tested the chocolate and rated it AAA Godiva chocolate.

That is what we call fraud and its a criminal offense. Fuckers should be wearing handcuffs.

 

[Dari]

I think we need to focus our mind on how vindictive this presidency has been, and less on what may or may not constitute "fraud". From jailing reporters to attacking capitalism, there is no bottom to this administration.

 

[Darwin333]

This myth that banks committed vast amount of fraud which led to the financial crisis is insulting to people that work in finance and embarrassing to those who sing it. It's just plain wrong. There are far too many fucking analyses, books, and papers to refute this. Those that claim this to be true have never been friends of capitalism. Never. The flaw was in the math. The theories. Everyone believed the same black swan theory, thereby invalidating it. This is what happened.

Seriously, you guys should be ashamed of yourself for believing that bankers brought down the world economy. They didn't. The primary culprits were assholes living above their means and politicians encouraging those assholes. The secondary culprits were the mathematicians who pumped out the same models based on the same presumptions. Bankers were honest brokers in all this, listening to the scientists and being blackmailed by shameless politicians. We know this.

Except one of the CEO's of one of the largest banks in the country who wrote a massive amount of subprime loans admitted to committing fraud under oath in Congressional testimony. He flat out said that he knew they were writing fucktons of loans that didn't meet their standards and sold them off as good paper, ie loans that did meet their lending standards.

Please explain how that isn't fraud? Please explain how loaning someone money you know for a mathematical fact that they can't pay off and then bundling them all up into some uber complicated trading instrument so people couldn't see how shitty the paper was and selling it as AAA isn't fraud. Please also explain how selling something that you guarantee has the proper paperwork in it but it doesn't isn't fraud? How about encouraging applicants to flat out lie, as damn near an industry standard, and then not disclosing that information to the people you sell the loan to isn't fraud?

If you are arguing flat out incompetence in the financial industry that cost untold trillions of dollars from the government, economy, peoples homes, etc.. leading us into a great recession, well then we need a metric fuckton more regulation on them and not less. Hell if they are that incompetent we damn near need a regulator standing over every last managers shoulder at all times.

 

[First]

I think we need to focus our mind on how vindictive this presidency has been, and less on what may or may not constitute "fraud". From jailing reporters to attacking capitalism, there is no bottom to this administration.

 

[Darwin333]

I agree that the fact that basically no one went to jail over this is absolutely insane. Although I know criminal prosecution for cases like these is hard, it is mind boggling that they basically couldn't find anyone.

Even the settlements haven't been nearly as big as they should have been, although I do appreciate that the SEC has started to demand that the banks admit fault instead of the usual "we will pay you $1 billion but still maintain we did nothing wrong" bs.

I don't know how hard prosecuting cases like this are but they sure had a lot of prosecutions during the savings and loan debacle and the guy that went after those bankers, very successfully, was all over the place saying the same could easily (and most definitely should) be done.

 

[etrigan420]

This.

Except I *am* sure, and there's no way he's serious.

 

[Darwin333]

I think we need to focus our mind on how vindictive this presidency has been, and less on what may or may not constitute "fraud". From jailing reporters to attacking capitalism, there is no bottom to this administration.

I agree that the DOJ should not be used for political reasons.

I also agree that political reasons should not be a reason the DOJ is not used.

The banking industry got the second one and you're currently bitching that a single company is getting the first one. Frankly, your entire industry should be sucking the presidents (both Bush and Obama's) dick along with the DOJs, not only did the industry get away with committing massive fraud the people that committed that fraud got to keep their ill-gotten gains.

BTW, it's funny how you were talking about capitalism earlier. Isn't one of the main tenants of capitalism that if a company does something risky and loses that said company should bear the results from their actions and go out of business? Capitalism says that all of the big banks should have went under.

 

[werepossum]

I agree with some of this, but will say that I'm not aware of Fannie underwriters telling private banks that they could ignore documentation, asset/job verification, signatures, etc. Also, the FHA insured a lot of non-conforming risky loans, but the extent of that risk was certainly not made 100% transparent by the primary mortgage lending culprits. That's just fraud, and obviously while regulators clearly share culpability, the bankers that actually took the steps to peddle these loans to the gov't in the secondary mortgage markets are clearly primarily at fault.

Fannie Mae dropped its own requirements for income, employment, and credit verification to buy loans as conforming. They didn't exactly tell banks and mortgage companies to do the same, but that's what it amounted to. Fannie Mae also defended this in Congressional hearings, calling them "outdated metrics". Personally I don't think that relieves banks and mortgage companies of the responsibility to make sound loans, but it certain makes Fannie Mae part of the problem.

I think we need to focus our mind on how vindictive this presidency has been, and less on what may or may not constitute "fraud". From jailing reporters to attacking capitalism, there is no bottom to this administration.

Um, what?

I agree that Obama's administration has often been petty and vindictive, but prosecuting fraud is defending capitalism, not attacking capitalism. Capitalism cannot survive with a multi-billion dollar industry fraudulently representing its products. And if S&P is the only bank so prosecuted - and we don't yet know that - that's still better than nothing.

 

[glenn1]

Well sure, agreed. Except when the junior tranches are being sold as high-grade, when in fact the underlying security is still crap. There were a whole swath of junior tranches that were simply inaccurately rated by S&P, with no excuses for it other than they wanted market share and profit. Ratings agencies receiving compensation is relatively new, btw, as recently as the 1970's. And plenty will tell you it makes them incapable of being impartial. To be fair, a lot of bankers knew the ratings agencies didn't really mean much, so I don't want to over inflate their impact.

Fine, I'll agree with you if that's what you need to hear. I still stand by my point that you're acting like this made any difference given the severity of the financial crisis thus making your entire post "true but irrelevant."

So I probably mostly agree with this, but that still means S&P didn't properly rate securities based on their fundamentals like they should have. They let market share and profit overshadow statutorily mandated ratings standards. That's my point here.

Again, you're complaining about not being rated on fundamentals that would have made no difference whatsoever when it mattered. All the ratings wound up being worth jack shit because no one in their right mind does ratings by considering what would happen in a scenario which things were five or six standard deviations off baseline.

Yes, and that's why you're supposed to have capital, insurance and other hedges. Goldman bet against sub-prime in 07, and convinced the greatest investor of all time to throw in billions during the height of the 08 panic. They saw the writing on the wall, they looked at the fundamentals (of course, they were also guilty themselves of other injustices).

They DID have other capital, which again made no difference when the crunch came. Do you think it was just an accident why multiple Investment Banks and Bank Holding Companies all failed at once? Do you think that the "capital, insurance, and other hedges" were all allowed by regulators to be inadquate at dozens of firms simultaneously and as diverse from Lehman Brothers to Wachovia Bank?

Then why weren't Moody's and Fitch fined a billion then also?

Who says they won't be?

When and if they ever are, I'll retract this complaint. Until then stop trying to justify why the least culpable was the one who got the big fine. Thus amplifying the very moral hazard risk you claim to be addressing.

 

[First]

Fannie Mae dropped its own requirements for income, employment, and credit verification to buy loans as conforming. They didn't exactly tell banks and mortgage companies to do the same, but that's what it amounted to. Fannie Mae also defended this in Congressional hearings, calling them "outdated metrics". Personally I don't think that relieves banks and mortgage companies of the responsibility to make sound loans, but it certain makes Fannie Mae part of the problem.

Fannie loosened underwriting, which they shouldn't have (ironically, at the behest of private interests of course), but they didn't tell originators/banks/firms to hold so many risky assets (no-doc, low-doc, etc.) nor did GSEs agree to be sold so many loans that fraudulently stated the true risk, either.

The GSE's are no doubt culpable, it's just something on the order of "pretty modest", say 10% or 20% if you had to put a number on culpability, while the private banks and originators are clearly culpable for much of the rest of the crisis, and borrowers culpable for a tiny bit too of course (for not reading contracts, taking on more debt than they could afford, etc.).

 

[First]

Fine, I'll agree with you if that's what you need to hear. I still stand by my point that you're acting like this made any difference given the severity of the financial crisis thus making your entire post "true but irrelevant."

Huh? It's true and relevant since this thread is about S&P being fined $1.37B for fraudulent ratings. You argued at the beginning of this thread the fine wasn't justified because the whole market was going to shit so therefore the tranches not being rated properly wasn't relevant, and I keep telling you that no matter how those S&P-rated tranches performed in 2008, they committed fraud before 2008 anyway.

Again, you're complaining about not being rated on fundamentals that would have made no difference whatsoever when it mattered. All the ratings wound up being worth jack shit because no one in their right mind does ratings by considering what would happen in a scenario which things were five or six standard deviations off baseline.

It was fraud, S&P has admitted this and paid $1.37B. You're conflating 2008 tranche performance with the fraud that was behind S&P purposefully ignoring fundamentals well before 2008.

They DID have other capital, which again made no difference when the crunch came. Do you think it was just an accident why multiple Investment Banks and Bank Holding Companies all failed at once? Do you think that the "capital, insurance, and other hedges" were all allowed by regulators to be inadquate at dozens of firms simultaneously and as diverse from Lehman Brothers to Wachovia Bank?

Wait what? Lehman was hedged well beyond 30:1 by 2008. Many firms were hedged far beyond reason given their boatload of risky MBS. Did you seriously not know this?

When and if they ever are, I'll retract this complaint. Until then stop trying to justify why the least culpable was the one who got the big fine. Thus amplifying the very moral hazard risk you claim to be addressing.

The least culpable got a paltry $1.37B fine, while the more culpable (JP Morgan Chase) got much bigger $10B-$20B+ fines. Mathematically it's pretty obvious that seems more or less in-line with S&P's culpability.

 

[werepossum]

Fannie loosened underwriting, which they shouldn't have (ironically, at the behest of private interests of course), but they didn't tell originators/banks/firms to hold so many risky assets (no-doc, low-doc, etc.) nor did GSEs agree to be sold so many loans that fraudulently stated the true risk, either.

The GSE's are no doubt culpable, it's just something on the order of "pretty modest", say 10% or 20% if you had to put a number on culpability, while the private banks and originators are clearly culpable for much of the rest of the crisis, and borrowers culpable for a tiny bit too of course (for not reading contracts, taking on more debt than they could afford, etc.).

Agreed, although the GSEs didn't do that at the behest of private interests but rather to try to meet their HUD requirements on poor and minority homes (a worthy goal in and of itself) which Congress continually increases. Had the banks and mortgage companies continued to exercise sound judgment in making loans, there would have been no crash. Had the banks and mortgage companies followed the GSEs in abolishing "outdated metrics" but honestly appraised houses, there would have been a correction, perhaps a modest crash. Had the banks and mortgage companies followed the GSEs in abolishing "outdated metrics" and dishonestly appraised houses but not bundled the resulting loans as AAA, there would have been a crash, but likely manageable since the market for junk mortgages would be self-limiting like any perceived risky investment. At every step of the way, banks and mortgage companies made things worse than they had to be, and damned if we didn't reward them for it with massive taxpayer subsidies.

 

[MrPickins]

I think we need to focus our mind on how vindictive this presidency has been, and less on what may or may not constitute "fraud". From jailing reporters to attacking capitalism, there is no bottom to this administration.

Divert! Divert!

 

[Mxylplyx]

It isn't. Do you know how difficult it is having federal banking regulators stationed inside your company? No other industry is treated this way. Like we're a bunch of criminals. There is no trust.

Wait, are we supposed to feel sorry for bankers? No other industry is capable of cratering the world economy and then cashing a bonus check afterwards. Cry me a fucking river.

 

[glenn1]

Huh? It's true and relevant since this thread is about S&P being fined $1.37B for fraudulent ratings. You argued at the beginning of this thread the fine wasn't justified because the whole market was going to shit so therefore the tranches not being rated properly wasn't relevant, and I keep telling you that no matter how those S&P-rated tranches performed in 2008, they committed fraud before 2008 anyway.



It was fraud, S&P has admitted this and paid $1.37B. You're conflating 2008 tranche performance with the fraud that was behind S&P purposefully ignoring fundamentals well before 2008.



Wait what? Lehman was hedged well beyond 30:1 by 2008. Many firms were hedged far beyond reason given their boatload of risky MBS. Did you seriously not know this?



The least culpable got a paltry $1.37B fine, while the more culpable (JP Morgan Chase) got much bigger $10B-$20B+ fines. Mathematically it's pretty obvious that seems more or less in-line with S&P's culpability.

I'm talking about the other rating agencies who used even worse models and you just don't care. And at this point I think I'm done with this conversation since you got your scalp and that's all you care about. Good thing that you've taught the ratings agencies to always sandbag their ratings and that no matter what they'll have a government-mandated market for their products, just don't make the mistake of putting into writing any discussion about tightening your ratings or how your products stack up against your competitors.

 

[fskimospy]

I'm talking about the other rating agencies who used even worse models and you just don't care. And at this point I think I'm done with this conversation since you got your scalp and that's all you care about. Good thing that you've taught the ratings agencies to always sandbag their ratings and that no matter what they'll have a government-mandated market for their products, just don't make the mistake of putting into writing any discussion about tightening your ratings or how your products stack up against your competitors.

You're right. They should probably avoid internal emails about how they are not going forward with a ratings system change due to its adverse impact on fees while publicly telling people that the fees they get have no impact on their rating choices.

They should avoid that because that's fraud, and fraud is a crime.

 

[glenn1]

You're right. They should probably avoid internal emails about how they are not going forward with a ratings system change due to its adverse impact on fees while publicly telling people that the fees they get have no impact on their rating choices.

They should avoid that because that's fraud, and fraud is a crime.

Okay. Again I guess you prefer Moody's, who just had their ratings worse the entire time and thus was taking market share from S&P based on that. Because that's the kind of behavior we want to encourage, just proactively ensure you're even more wrong than the other guy because "fraud" of trying to fix your ratings to be more accurate is worse. Heck, maybe Moody's should just rate everything Aaa because that's how you avoid prosecution in Eskimospy world.

 

[fskimospy]

Okay. Again I guess you prefer Moody's, who just had their ratings worse the entire time and thus was taking market share from S&P based on that. Because that's the kind of behavior we want to encourage, just proactively ensure you're even more wrong than the other guy because "fraud" of trying to fix your ratings to be more accurate is worse. Heck, maybe Moody's should just rate everything Aaa because that's how you avoid prosecution in Eskimospy world.

Nope, I just prefer less fraud. Apparently you prefer more.

If S&P is going to change their ratings based on how many fees they get that's fine! In that case though they shouldn't be telling people they aren't doing that, because that's the textbook definition of fraud.

How is this hard to understand.

 

[werepossum]

Okay. Again I guess you prefer Moody's, who just had their ratings worse the entire time and thus was taking market share from S&P based on that. Because that's the kind of behavior we want to encourage, just proactively ensure you're even more wrong than the other guy because "fraud" of trying to fix your ratings to be more accurate is worse. Heck, maybe Moody's should just rate everything Aaa because that's how you avoid prosecution in Eskimospy world.

From a liability standpoint, one would be better off rating everything AAA than honestly judging most things and then artificially pushing one C as AAA, yes. Without a doubt. And if you then bet on it to fail, at a level you can't support as being a hedge, then it's pretty much impossible to argue that you were fooled or simply mistaken in that one instance. I'm neither a lawyer nor a trader/investment banker, but it seems to me that S&P's position is the absolute least defensible one possible.

 

[glenn1]

From a liability standpoint, one would be better off rating everything AAA than honestly judging most things and then artificially pushing one C as AAA, yes. Without a doubt. And if you then bet on it to fail, at a level you can't support as being a hedge, then it's pretty much impossible to argue that you were fooled or simply mistaken in that one instance. I'm neither a lawyer nor a trader/investment banker, but it seems to me that S&P's position is the absolute least defensible one possible.

If that's the result Eskimospy wants it is fine with me. It's the logical outcome of his position anyway.

 

[Zorba]

It isn't. Do you know how difficult it is having federal banking regulators stationed inside your company? No other industry is treated this way. Like we're a bunch of criminals. There is no trust.

Try to work for an airline, you cry baby. The FAA has the power to basically fire any mechanic/pilot and they use that power fairly often. The FAA inspectors are always there.

So when the FAA grounded American's 300+ MD-80s twice and then proposed a fine of over $350M over what basically amounted to American doing the work in an acceptable manor just differently than specifically written (Even Boeing told the FAA there was no safety issues), was that just Bush retaliating against American for moving work from Texas to Oklahoma? "$25,000 per flight because you put wire ties every 3 inches instead of every 6..."

 

[Dari]

Fannie Mae dropped its own requirements for income, employment, and credit verification to buy loans as conforming. They didn't exactly tell banks and mortgage companies to do the same, but that's what it amounted to. Fannie Mae also defended this in Congressional hearings, calling them "outdated metrics". Personally I don't think that relieves banks and mortgage companies of the responsibility to make sound loans, but it certain makes Fannie Mae part of the problem.


Um, what?

I agree that Obama's administration has often been petty and vindictive, but prosecuting fraud is defending capitalism, not attacking capitalism. Capitalism cannot survive with a multi-billion dollar industry fraudulently representing its products. And if S&P is the only bank so prosecuted - and we don't yet know that - that's still better than nothing.

S&P is not a bank. It's a ratings firm.