June 24, 2013 "Information Clearing House - "Rolling Stone" -- That was among the responses of a spokesperson for the ratings agency Standard & Poor's when I contacted him a few weeks ago in advance of a new Rolling Stone feature, "The Last Mystery of the Financial Crisis," which describes the role the ratings agencies played in causing the 2008 crash. The company was genuinely miffed that anyone would impugn its honesty. In one relatively brief e-mail, the spokesperson used variables of terms like "independent," "integrity" and "transparent," upwards of nine times.
Hold that thought.
"The Last Mystery of the
Financial Crisis" makes great use of documents uncovered in years of painstaking
research by attorneys at Robbins Geller Rudman
& Dowd, a San Diego-based firm that was at the forefront of major
lawsuits against the industry. The material those lawyers found leaves virtually
no doubt that the great ratings agencies like Moody's and S&P essentially
put their analysis up for sale in the years leading up to the crash.
I picked some of the more
damaging of these documents to ask about. Like for instance, an email from a
company executive reading, "Lord help our fucking scam. . . . This has to be the
stupidest place I have worked at."
Out of context, they
said.
What about other highly
suggestive emails, like the one in which an analyst joked that "we have just
stuck our preverbal [sic] finger in the air!!", or the one in which an analyst
admitted his quantitative model was only marginally more reliable than "flipping
a coin"?
Not only cherry-picked and out
of context, but "contradicted by other evidence," is how the S&P man put
it.
"They do not reflect our
culture, integrity or how we do business," he said. Note the word integrity
again.
I point this out because the
ratings agencies' responses to the questions we posed for the piece were almost
as revealing as the extremely damaging emails and internal documents the Robbins
Geller lawyers uncovered.
It wasn't just that there was
apparently an entire generation of internal email correspondence that had been
taken out of context (apparently, the context was taken out of context). More
interesting was another line of defense.
Not long before I contacted
them, S&P had made, in a very graphic and comical manner, a very
strange argument in court. In an attempt to dismiss a federal Justice
Department lawsuit pending against S&P, the company had, in a court motion,
cited a Florida court case, Boca
Raton Firefighters and Police Pension Fund v. Bahash.
In that case, the Second
Circuit ruled that the plaintiffs suing S&P could not make a fraud claim
based upon the company's reassurances in its Code of Conduct of its
"objectivity, integrity and independence."
Moreover, the Court said,
plaintiffs could not make a claim based on a public statement by S&P touting
its "credibility and reliability," or another saying, "[S&P] has a
longstanding commitment to ensuring that any potential conflicts of interest do
not compromise its analytical independence."
Why, you might ask, could one
not make a fraud claim based upon those statements? Because, the Second Circuit
ruled, those statements were transparently not meant to be taken seriously. The
following passage is a summary written
by S&P's own lawyers describing the Second Circuit
ruling (emphasis mine):
The Second Circuit affirmed the district court's dismissal of the plaintiffs' claims in their entirety, finding that the statements concerning the "integrity and credibility and the objectivity of S&P's credit ratings" were exactly "the type of mere 'puffery' that we have previously held not to be actionable."
More from that same memo from
S&P's lawyers:
The Court found . . . that "generalizations about [S&P's] business practices and integrity" were "so generalized that a reasonable investor would not depend on [those statements]. . . ."Because S&P's statements about its objectivity, independence and integrity are the sort of vague, general statements that courts both within and outside this Circuit have found insufficient to support a fraud action, the Government's first "alleged scheme to defraud" fails.
Now, in response to my
questions, the S&P spokesman made a series of arguments about the plaintiffs
in the lawsuits in question. All of these points came down to the same idea:
that these investors were big boys, and should have known better than to rely
upon an S&P rating.
"Most of the plaintiffs were
sophisticated institutional investors that did not actually rely on the ratings
in making decisions," he wrote. These plaintiffs, he went on, were "large
institutional investors with significant investment staffs of their own," and
some of them, he pointed out, didn't cover themselves in glory with their
background research.
One institutional investor, he
wrote, "admitted that it did no more than look at the rating and the yield on a
Bloomberg screen, spending no more than five minutes deciding to invest $50
million." All they did was look at our rating before investing! What
idiots!
This is straight out of
Animal House. It's the Wall Street version of, "You fucked up – you
trusted us!"
I don't often get angered by
the things press spokespeople say. Most of these people have difficult jobs and
are often forced to be the public faces of policies they had nothing to do with
creating.
But in this case, S&P just
a few weeks before had sworn before a judge that its reassurances about
objectivity, integrity and independence were not legally binding, vague, and so
generalized as to be essentially meaningless.
Yet when I contacted this
company, they sent me exactly, and I mean exactly, the same
reassurances about objectivity, integrity, and independence that they themselves
had laughed at as "mere puffery," "vague," and "so generalized that a reasonable
investor would not depend" on them.
Then they went on to deride
the plaintiffs in their lawsuit for not being smart enough to do their own
research and make their own assessments about the meaning of an S&P rating,
and the value of its reassurances of independence and integrity. Yet us
reporters are apparently still expected to take such assurances at face value,
which if my math is correct means that in their eyes, we must be even dumber
than the investors in the products they rate. What a bunch of
assholes!
Anyway, if you want the full
lowdown on what actually goes on internally at these companies, check
out the piece, which is full of the devastating material dug up by those San
Diego lawyers.
Also, thanks so much to the
excellent Chris Hayes at MSNBC, who had me on last night to
discuss the issue. It was a very fun talk.
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