Tuesday, August 23, 2011

Companies Paid S&P For Ratings?

Dear Madame L,

Did I understand correctly from your recent column about Standard & Poor's that companies actually PAID S&P for good ratings?

How is that not a conflict of interest?



Dear Puzzled,

Yes, they did, and yes, any reasonable person would understand that as a conflict of interest, and yes, that seems to be one of the roots of the problems with the financial rating system, and one that the Dodd-Frank legislation was supposed to address. However, even though that bill passed Congress, the federal regulators charged with enforcing it have been slow to put it into effect.

This article points out, "Before the financial crisis, banks shopped around to make sure rating agencies would award favorable ratings before agreeing to work with them. These banks paid upward of $100,000 for ratings on mortgage bond deals, according to the Financial Crisis Inquiry Commission, and several hundreds of thousands of dollars for the more complex structures known as collateralized debt obligations."
Yes, that's correct: Banks shopped around for the best deal in ratings and paid $100,000 or more for good ratings, which S&P was apparently happy to give, money in pocket, even for worthless mortgage bonds.

The same article says that some of S&P's mortgage raters have quietly been shifted to different jobs in the McGraw-Hill company which owns S&P. These include the former head of structured finance, former head of ratings, and former head of residential mortgage bond ratings. 

Also, you may be happy to hear that S&P has just hired a new CEO, Doublas Peterson. According to Bloomberg, the old CEO, Deven Sharma, has (get this!) decided to leave to “pursue other opportunities.”

Several of the people who oversaw S.& P.’s mortgage-related ratings went on to different jobs at McGraw-Hill Companies, including Joanne Rose, the former head of structured finance; Vickie Tillman, the former head of ratings; and Susan Barnes, former head of residential mortgage bond ratings. But many "crucial people" still work at the company.

Remember, you can help light a fire under the reluctant buttocks of the U.S. Department of Justice to encourage it to make the investigation a meaningful one.

And please keep reminding YOUR government to do its job of helping us and protecting us from the rapacious corporations and individuals who see us as peons, workers who exist for their profits.

Go on, do it!

Madame L

1 comment:

AskTheGeologist said...

Wow. If something smells like a 5-day-dead skunk, it sure can grab your attention. This is more like a week-gone-bad rhino. There are all KINDS or red flags in this! Thanx for providing so many details.

All those people may have moved quietly, but they are still susceptible to summons from any investigative wing of the US Government.

Could the AA+ down-grade (the other two ratings agencies still rate the US as AAA) have been a preemptive strike to intimidate the Justice Department? Pretty clumsy, if you ask me.