Tuesday, February 5, 2013

No Win Situation for S&P

The US Justice Dept. has filed suit against Standard & Poors (S&P) for ignoring its own standards in rating, often as "AAA," mortgaged-backed securities that before bundling were, essentially, junk. The suit comes after months of negotiations between the government and the private rating agency failed to result in a settlement.

The government reportedly is seeking more than $1 billion in damages on grounds that S&P "falsely represented that its credit ratings of RMBS and CDO tranches were objective, independent, uninfluenced by any conflicts of interest that might compromise S&P's analytical judgment, and represented S&P's true current opinion regarding the credit risks." S&P has responded that the lawsuit is without legal or factual merit (see here).

Frankly, I don't see what S&P has to gain by going to court over this. Even if S&P is correct  that it is being singled out for punishment for failing to foresee, like nearly everyone else, the collapse of the housing market, its only real defense would seem to amount to this: the misleading and grossly inaccurate ratings of mortgage-backed securities resulted from ignorance or negligence, rather than any intentional effort to mislead consumers.

Personally, I'd retain more confidence in a rating agency that admitted intentional wrongdoing, and paid the price, than one that conceded (falsely or honestly) that it was a dupe and didn't know what it was doing.

1 comment:

  1. I haven't seen much commentary on how the the poor incentive structure of the securities ratings system contributed to the crisis, and how it hasn't been fixed. I say the SEC should distribute the products to be rated, to whomever wants to give it a go, and they get paid based on how accurate they are (over specified time horizons).


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