Eric Von Berg - Newmark Realty Capital - 595 Market Street, Suite 2550, San Francisco, CA 94105 - for loan quote: 415 956 9922

April 25, 2013

Are rating agency’s ratings based upon independent objective research or just on puffery?


S&P’s lawyers claim, it's puffery...

In our Federal Government’s belated response to the financial collapse, the US Justice Department filed a $5 billion lawsuit in February 2013 against S&P for their role in rating the mortgage-backed securities that became toxic.  S&P told investors that their ratings were the result of thorough research and that such ratings were “independent, objective and free of conflicts of interest”. 
The government’s suit claims: “… S&P knew these representations were material false and concealed facts, in that S&P’s desire for increased revenue and market share … led S&P to downplay and disregard the true extent of the credit risk…”

On Monday S&P’s lawyers filed a response asking that the case be thrown out. 

S&P said, “These CDO's are THE BEST!!!” Instead, they turned out to be “OFFAL!”
"... the Government claims that S&P engaged in a scheme to defraud investors by asserting that its ratings were independent, objective and uninfluenced by conflicts of interest when S&P knew or believed that in truth they were not. This claim fails because the statements at issue are not actionable. Each of the representations identified by the Government is the type of vague, generalized statement that court after court -- in this District, this Circuit and elsewhere across the country -- has held to be non-actionable in a federal fraud case such as this."

The S&P lawyers’ claim is that S&P engaged in “classic puffery”.  Marketing hyperbole is allowed as a form of advertising.  If the CD cover say’s “The BEST of Johnny”, could you really bring the CD back for a refund because you dont agree it's not Johnny Cash’s “BEST”?   No, you couldn’t. 

The S&P lawyers’ defense boils down to that famous line from the movie Animal House, when Bluto and Otter say to a crying Flounder as he confronts his father's ruined car: "You can't spend your whole life worrying abut your mistakes!  You fucked up, you trusted us!"

But, what is S&P selling if not it’s reputation as “independent and objective”?  Yet, their own lawyers claim S&P (and other rating agencies) are just stamping approvals on securitized loan pools to help sell the bonds  - Even if they have to hold their noses to do it.  And we in the investor public can only blame ourselves if we trust them.