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

[Dari]

For such an effusive person, Pres. Obama has been a real dick when it comes to attacking the free market. He has used the Justice Department to go after his enemies in business.

link

How the Justice Department, S&P Came to Terms

A record settlement expected Tuesday between the Justice Department and Standard & Poor’s Ratings Services came together over two days in mid-January when the two sides agreed to move past a feud triggered by a surprise downgrade of U.S. debt, according to people familiar with the talks.

In the span of about 30 hours, the Justice Department lowered its asking price and backed off demands that S&P admit to violating laws when it issued rosy grades on risky mortgage deals, the people said. Doing so would have left the ratings firm vulnerable to future lawsuits. S&P, meanwhile, agreed to raise its offer above a key threshold and withdraw its assertion that the Justice Department lawsuit was political retaliation for the ratings firm’s 2011 downgrade, the people said.

The concessions marked a turning point in a battle that peaked in 2013 with verbal jabs and concluded with boxes of doughnuts and a pact in which S&P will pay more than $1.37 billion to settle claims it relaxed standards to win business in the buildup to the financial crisis, the people said. The payout is nearly 10 times as large as any other previous settlement involving credit-rating firms.

Investors rely on ratings from S&P, Moody’s Investors Service and Fitch Ratings when deciding whether to buy bonds. The three issue about 95% of credit ratings globally.

The Justice Department and states alleged that S&P, a unit of McGraw Hill Financial Inc., knowingly misled investors by marketing its top-notch grades of residential-mortgage bonds as being independent and objective. Those ratings turned out to be inaccurate when the housing market collapsed, triggering widespread downgrades and helping cause the financial crisis.

Under the settlement, the Justice Department will receive $687.5 million. Some 19 states and the District of Columbia will share a similar amount, the people said.

Separately, S&P completed a $125 million settlement late Monday with the California Public Employees’ Retirement System, or Calpers, the country’s biggest public pension fund by assets, over another crisis-era lawsuit. That brings the total payout to $1.5 billion.

Meanwhile, the Justice Department is in the early stages of a probe into ratings by Moody’s Investors Service of mortgage securities before the crisis, people familiar with the matter have said. A Moody’s spokesman declined to comment.

This reconstruction of the events leading up to the S&P deal is based on interviews with people close to the talks.

The relationship between the two parties began to unravel after August 2011 when S&P was the only one of the three big rating firms to downgrade U.S. debt. Days after the move, then-Treasury Secretary Timothy Geithner , after a meeting with President Barack Obama , placed an angry phone call to Harold McGraw III, then chief executive of McGraw Hill, in which he said the firm’s conduct would be “looked at very carefully,” according to an affidavit submitted by the company. Mr. Geithner has denied, through a spokeswoman, that he threatened or took any action to prompt retaliatory action against S&P.

The Justice Department has also denied the lawsuit was retaliation for the downgrade. Privately, officials described the argument as an offensive attack on the department’s independence.

Over the next 18 months, the two sides tried and failed to reach a settlement as S&P balked at the government’s demand for more than $1 billion and admissions of wrongdoing. The Justice Department brought its suit against S&P in February 2013.

 

[brycejones]

Imagine that the WSJ defending S&P's horrible rating practices.

OP is just pissed S&P was held accountable for contributing to an economic meltdown.

 

[nickqt]

So, the Justice Department fined a business that committed fraud, and it's Obama being a dick against business?

You can tell Obama hates business, since the recent cratering of the Dow Jones and Nasdaq has brought us nothing but decreasing employment numbers and a negative GDP.

Why does Obama hate Amurica so much, do y'all think?

 

[ivwshane]

Wow! I think mental illness is becoming an epidemic! Seek help OP! Thanks to the ACA, your pre existing condition is now covered!

 

[Spungo]

After putting AAA ratings on no-document junk mortgages, I'm amazed anyone cares what S&P thinks.

 

[Dari]

Yes, yes. Let's all ignore what Tim "Turbotax" Geithner said:

The relationship between the two parties began to unravel after August 2011 when S&P was the only one of the three big rating firms to downgrade U.S. debt. Days after the move, then-Treasury Secretary Timothy Geithner , after a meeting with President Barack Obama , placed an angry phone call to Harold McGraw III, then chief executive of McGraw Hill, in which he said the firm’s conduct would be “looked at very carefully,” according to an affidavit submitted by the company.

 

[fskimospy]

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.

 

[Dari]

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.

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.

 

[fskimospy]

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.

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

 

[khon]

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.

No other industry commited such widespread fraud that it crashed the entire world economy.

The banking industry got off incredly light.

 

[brycejones]

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

No other industry commited such widespread fraud that it crashed the entire world economy.

The banking industry got off incredly light.

The OP is just pissed it is a bit harder to lie, cheat, and steal now. Notice not impossible just one or two more hoops to jump through. Damn it that is just to much effort to rake in billions of dollars.

 

[brycejones]

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.

Because you got drunk and crashed the car and then had the balls to ask for a new car.

 

[glenn1]

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

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.

 

[Moonbeam]

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.

I get it. Wallpaper is like Wall Street.

 

[fskimospy]

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.

The "fraud" wasn't having products they rated not perform well the fraud (no quotes) was knowingly using inaccurate models and knowingly deciding to rate things more highly than they would otherwise to keep market share. Ie: lying to consumers in order to profit, otherwise known as fraud.

 

[Bitek]

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.

Correct. No one trusts bankers because they act like a bunch of reckless criminals.

No one cares about your whining. The fraudsters crashed the world economy and cry about reparations...

 

[PokerGuy]

The "fraud" wasn't having products they rated not perform well the fraud (no quotes) was knowingly using inaccurate models and knowingly deciding to rate things more highly than they would otherwise to keep market share. Ie: lying to consumers in order to profit, otherwise known as fraud.

Agreed. IMO, S&P got off pretty light, just like other large institutions have gotten off pretty light considering the damage that was done. It obviously wasn't just one company doing something, it was a bunch of things coming together, including the type of shenanigans S&P was engaging in.

I have no problem with the DoJ going after S&P (and others) for their activities. I very much have a problem with using government agencies to punish political enemies or actions not liked by the white house. Geitner and his cabal threatening to come after them when they downgraded US debt rating smacks of political retribution. The message of "if you do something we don't like, you're going to feel the wrath of government" is loud and clear, and it should not be acceptable.

Holding companies accountable = good. Using the DoJ or IRS or any myriad of other agencies to punishing them over politics = bad.

 

[glenn1]

The "fraud" wasn't having products they rated not perform well the fraud (no quotes) was knowingly using inaccurate models and knowingly deciding to rate things more highly than they would otherwise to keep market share. Ie: lying to consumers in order to profit, otherwise known as fraud.

Have you even read the Statement of Facts?

Basically your argument boils down to this:

1. S&P didn't go/no-go an update to its rating system quickly enough (regardless of whether there were any technical reasons for this)

2. S&P didn't place a sufficient number of issues on Credit Watch per your 20/20 hindsight POV

3. S&P didn't use evaluation criteria it was still evaluating and hadn't even approved yet to rate issues between Feb-Jun 2007 and instead used existing criteria. Edit: When doing so would itself been a violation of Reg FD if the ratings change for old issues wasn't changed at the same time.


Shit, by your amazing standards of fining companies who not only don't predict the future perfectly but do it sufficiently far ahead of time, we should be placing fines against all kinds of businesses. Instead of bailing out Chrysler we should have fined them billions of dollars for building too many cars ahead of the recession and not changing their fleet mix quickly enough to more fuel efficient cars.

 

[fskimospy]

Have you even read the Statement of Facts?

Basically your argument boils down to this:

1. S&P didn't go/no-go an update to its rating system quickly enough (regardless of whether there were any technical reasons for this)

2. S&P didn't place a sufficient number of issues on Credit Watch per your 20/20 hindsight POV

3. S&P didn't use evaluation criteria it was still evaluating and hadn't even approved yet to rate issues between Feb-Jun 2007 and instead used existing criteria. Edit: When doing so would itself been a violation of Reg FD if the ratings change for old issues wasn't changed at the same time.

Shit, by your amazing standards of fining companies who not only don't predict the future perfectly but do it sufficiently far ahead of time, we should be placing fines against all kinds of businesses. Instead of bailing out Chrysler we should have fined them billions of dollars for building too many cars ahead of the recession and not changing their fleet mix quickly enough to more fuel efficient cars.

That bears no resemblance to my argument.

Speaking of the statement of facts, did you read it? S&P didn't update their rating system specifically because they wanted to retain market share. They knowingly stuck with an inferior measure so that they could rake in more fees despite issuing public statements to consumers that they do not allow the fees they get from banks to alter their judgments.

That's fraud, brotha.

 

[Dari]

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.

 

[yllus]

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.

Oh good, bankers aren't liars, they're just massively incompetent.

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.

Leading banks knowingly packaged good loans with terrible loans and sold them to a secondary market branded as a lump of good loans. Other banks took said lumps at face value without really understanding what was in them. They were either incompetent or uncaring as long as the money kept flowing. The entire situation still screams for a need for tighter controls and more scrutiny. I do understand how onerous that tends to be (I've worked with/at banks), but they entirely deserve it.

 

[ivwshane]

Lol! Good one! I almost fell for it!

 

[glenn1]

Oh good, bankers aren't liars, they're just massively incompetent.

Why, because they're not omnipotent and can't pinpoint the exact moment when a cascading failure event was going to happen? The real estate bubble was no different than a stock bull market, everyone knows by definition it has to come down sometime but determining exactly when it will happen is impossible. If it was then it would be a rigged market.

Leading banks knowingly packaged good loans with terrible loans and sold them to a secondary market branded as a lump of good loans. Other banks took said lumps at face value without really understanding what was in them. They were either incompetent or uncaring as long as the money kept flowing. The entire situation still screams for a need for tighter controls and more scrutiny. I do understand how onerous that tends to be (I've worked with/at banks), but they entirely deserve it.

It was a systemic failure. Once the crisis began there essentially was no such thing as a a "good loan." There was a massive flight to liquidity and no financial product was left unscathed. The fucking commercial paper market froze up, and here you are bitching about whether some of the lower tranches of a CDO got rated a couple notches higher than you think they deserved? Half the problem was a government that mandated that in order to be judged "well-capitalized" the financial institutions needed to maintain a certain amount of products rated by the same Nationally Recognized Statistical Rating Agencies that you're now decrying. Do you not see how incredibly circular the entire stupid process was? To be judged "safe" banks had to hold the instruments that people like S&P judged safe, and if they used the wrong metrics to rate them then EVERYONE failed because their "safe" capital was shit. The government basically outsourced the due diligence process from the investment firms to the S&Ps of the world.

 

[yllus]

Why, because they're not omnipotent and can't pinpoint the exact moment when a cascading failure event was going to happen? The real estate bubble was no different than a stock bull market, everyone knows by definition it has to come down sometime but determining exactly when it will happen is impossible. If it was then it would be a rigged market.

I'd say that this was quite a bit different from your standard bull market reaching its apogee. This crash is pretty widely considered to only have one historical event that's come close to it - the world-beating Black Tuesday and the Great Depression. So no, I don't think this is just another bubble that happened to pop that I'm unfairly expecting bankers to predict timing on.

But let's say it was just another bubble. Bubbles pop for lots of reasons, but rarely are the weaknesses so obvious if anyone had bothered to take a good look at what was being bought and sold.

It was a systemic failure. Once the crisis began there essentially was no such thing as a a "good loan." There was a massive flight to liquidity and no financial product was left unscathed. The fucking commercial paper market froze up, and here you are bitching about whether some of the lower tranches of a CDO got rated a couple notches higher than you think they deserved? Half the problem was a government that mandated that in order to be judged "well-capitalized" the financial institutions needed to maintain a certain amount of products rated by the same Nationally Recognized Statistical Rating Agencies that you're now decrying. Do you not see how incredibly circular the entire stupid process was? To be judged "safe" banks had to hold the instruments that people like S&P judged safe, and if they used the wrong metrics to rate them then EVERYONE failed because their "safe" capital was shit. The government basically outsourced the due diligence process from the investment firms to the S&Ps of the world.

You're talking symptoms and I'm talking causes. Sure, lots of very bad things happened once the crash was underway. That's practically irrelevant to the topic of prevention.

Gross negligence and willful misleading of the market were, in my opinion, the root causes of the crash. That extends to the banks who first packaged crap, the ratings agencies that fell over backwards to curry favour with the banks they were supposed to neutrally evaluate, the regulators who didn't pay enough attention... Lots of people to blame for this one. I tend to assign the least amount of blame to overworked, underpaid, hopelessly outmatched regulators and to the common man who has no hope of understanding this financial instruments if bankers themselves obviously don't either.

I think you make a good point about the government outsourcing the due diligence process. S&P and its competitors work under a ridiculous, broken pay model which guarantees they will never be neutral. It makes the most sense to have that job handled by the government.

 

[glenn1]

I'd say that this was quite a bit different from your standard bull market reaching its apogee. This crash is pretty widely considered to only have one historical event that's come close to it - the world-beating Black Tuesday and the Great Depression. So no, I don't think this is just another bubble that happened to pop that I'm unfairly expecting bankers to predict timing on.

But let's say it was just another bubble. Bubbles pop for lots of reasons, but rarely are the weaknesses so obvious if anyone had bothered to take a good look at what was being bought and sold.



You're talking symptoms and I'm talking causes. Sure, lots of very bad things happened once the crash was underway. That's practically irrelevant to the topic of prevention.

Gross negligence and willful misleading of the market were, in my opinion, the root causes of the crash. That extends to the banks who first packaged crap, the ratings agencies that fell over backwards to curry favour with the banks they were supposed to neutrally evaluate, the regulators who didn't pay enough attention... Lots of people to blame for this one. I tend to assign the least amount of blame to overworked, underpaid, hopelessly outmatched regulators and to the common man who has no hope of understanding this financial instruments if bankers themselves obviously don't either.

I think you make a good point about the government outsourcing the due diligence process. S&P and its competitors work under a ridiculous, broken pay model which guarantees they will never be neutral. It makes the most sense to have that job should be done by the government.

You're leaving out a few major things; like the "Greenspan Put", rates being held too low for too long creating a reach for yield, government policy that encouraged home ownership as a good thing in itself, bespoke financial products... I could go on but I think you get the point.

I'm also baffled by those who blame S&P rating methodology. Your approach would reward the other rating agencies for having used "easier" models throughout as opposed to S&P not moving to even "stricter" models which would have handed the business to their "easy model" competition. If anything you should be seeking a settlement with the companies that ARE NOT named S&P.