All those associated with the sub-prime loans scandal that led to the global financial crisis of 2008 have paid the price one way or another. Banks and financial institutions have taken large write-offs on their balance-sheets, causing valuations to fall. Investment banks either went belly up or accepted ignominious lifelines from healthier peers. Investors have seen their lifetime savings wiped out and governments have been voted out of power. Indeed, the global economy — including the economies of countries which were in no way involved with the misdemeanours of the U.S. housing and financial sector — is still paying the price. Yet, ratings agencies, one of the primary villains of the sub-prime loans-driven financial crisis, had largely escaped punishment. That was until Monday when the U.S. government slapped a lawsuit against the foremost of the Big Three ratings agencies — Standard & Poor’s — seeking $5 billion in punitive damages for defrauding investors. More than the financial damage that this lawsuit will cause — and it is potentially serious, given that the revenues of The McGraw-Hill Companies, of which Standard & Poor’s is a division, were just $6.24 billion in 2011 — it is the blow to S&P's reputation that will hurt more. From the suit filed by the Department of Justice (DoJ) it is clear, despite protestations from S&P, that the agency assigned dubious ratings to complex financial instruments with the outright intent to defraud investors.
From September 2004 through October 2007, says the suit, S&P “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in certain mortgage-related securities. S&P, the suit says, falsely claimed its ratings “were objective, independent, uninfluenced by any conflicts of interest.” At the height of the sub-prime loans frenzy, ratings agencies merrily dished out top-notch scores to esoteric financial instruments such as collateralised debt obligations (CDO) which were nothing but a bundle of mortgage-backed securities made up of dubious housing loans. Emails accessed by the DoJ clearly show that ratings analysts in S&P were uncomfortable at rating substandard loans as prime but had to submit to business pressures. The evidence clearly points to intentional fraud. Interestingly, though Moody’s and Fitch, the other two of the Big Three, were equally guilty of assigning dubious ratings, the U.S. government has gone after S&P alone for now, prompting talk that it is revenge for the downgrade of the U.S. from its stellar ‘AAA’ by S&P in August 2011. Maybe so, but it still cannot detract from the merits of the case. S&P played a pivotal role in precipitating the sub-prime crisis and it needs to be called to account.
Keywords: Standard & Poor, Moody's ratings, collateralised debt obligations, global economy, three rating agencies, global financial crisis, Department of Justice
Maybe true that this is a far too complex subject for a layman to comprehend, but that said, the fact is still the same that rating agencies intentionally and knowingly played along in this big dice game that they promoted and let people wager on!
No point in ridiculing the messenger!
A one sided argument written by a "occupy wall street" point of view. If S&P is at fault, so is Moody's & Fitch. US govt have themselves made it mandatory for firms to get themselves rated by rating agencies. Again, if this event happened in 2007-08, why nothing has happened till now and why single out S&P. These aspects have been largely neglected by the author in his/her glee at "corporates" being given the stick. Wish we had people with intellectual honesty and no agendas writing on complex topics like these.
Although, S&P need to be punished for its misdeeds, the fact that the case was slapped after it rubbed the ego of the US of A, clearly demonstrates that such acts out of vengence is a global trend.
The most important point is the timing. Does it take 3+ years for the government to understand that the rating agencies are fiddling with the numbers? Why action only against S&P and not the rest?
Even serious crimes are overlooked as long as he does not mess up with the Govt.
There has never been an example of "fair" capitalism, then why talk about "crony" capitalism. Capitalism is always for crony. The moment money accumulates in one person, that person will try to buy everything from govt to the system. It is only a matter of when he succeeds and once he succeeds in buying the system it becomes a crony capitalism.
As we see in our country, when Vodafone avoided taxes, govt was forced by public opinion to introduce GAAR. But then Vodafone "bought" those who were meant to be implementing GAAR and settled it. A paid media also propagated that deferment of GAAR was a "pro-investor measure" which will fetch us "ratings" from agencies like above.
Financial crisis cannot occur in fortnight. It takes years for setting
it up. What did U.S government do when people are going for sub-prime
loans even though interest rates were considerably high?? Why didn't
they provide loans at lower interest rates?? When housing sector went
down, why didn't U.S government take action to prevent the crisis
considering people have borrowed sub-prime loans ?? We can't take blame
away from credit rating agencies but at the same time even government
deserves the blame.
Through crony capitalism, a miniscule have prospered beyond imagination-now common people will pay price through questionable ratings of institutionsand housing sectors in which many among common people have invested money!
These are the same rating agencies who demand "more liberalization" from India, otherwise threatening to "downgrade". Points to the fact that liberalization in itself is a nostrum prescribed by quacks who feign to be "Dr."s in Economics.
And we think that fate of our econmony depends on sovereign ratings assigned by these rating agencies!
The standard maintained was not only poor but deliberate.as lord denning said you
cannot judge judges and there cannot be an audit. But one had to trust
someone.independent of the administration these agencies were trusted and if they.
Had breached such trust, as it apeears clear, they deserve tpbpay the price.such price
must be commensurate to the price paid by the economy.having seen the rajat gupta
episode one can assume that a bharara is on the wings to take this suit to its logical
conclusion which standard and poor richly deserves.
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