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S&P's Settlement With the SEC Isn't the End of Its Problems

  

uniongazette.com | January 25, 2015

Normal & Poor's is poised to settle a key Securities and Exchange Commission investigation of ratings of securities in the industrial-mortgage bond marketplace. The SEC will exact a extreme punishment: a yearlong suspension from grading securities backed by various industrial loans, according to Bloomberg News. But wait, there's a lot more: S&P has but other problems with the government that will likely require expensive settlements and raise added inquiries about the credit rater's credibility. Here's what you need to know:

What is going on right now? The SEC notified S&P in July that investigators have been snooping about industrial mortgage-backed securities (CMBS) from 2011. The alleged violations had been connected to S&P's evaluations of the securities and "public disclosure made by S&P with regards to these ratings," according to a regulatory filing by S&P's parent, McGraw Hill Financial. In plain English, that implies the SEC suspected that S&P monkeyed around with its criteria to win additional company from issuers. The incipient deal to resolve those allegations, which Bloomberg News said may perhaps be announced as quickly as Wednesday, would ban S&P from a important portion of the CMBS marketplace for a year. That would amount to the regulator's toughest enforcement action in recent memory against a credit-rating corporation. Spokespeople for S&P and the SEC declined to comment, according to Bloomberg News.

Why does this matter? S&P will drop a boatload of costs though its analysts sit on their hands. New York-based S&P's competitors—Moody's Investors Service, Fitch Ratings, and the upstart Kroll Bond Rating Agency—will all advantage in the brief run by grabbing small business S&P has to surrender. A single has to wonder no matter whether, at some point, the repeated concerns raised about S&P's credibility will erode the biggest credit-rating company's top position in the marketplace. I imply, even if S&P hasn't committed fraud, as the government has alleged, doesn't its apparent incompetence eventually catch up with the organization? (By the way, on the CMBS matter, the attorneys common of New York and Massachusetts are also reportedly investigating S&P.)

What's that about alleged fraud? Earlier this month, the proverbial individuals familiar with the matter murmured that S&P is close to a separate settlement of about $1 billion with the Justice Division. That deal would address allegations that the business misled investors about ratings of residential (as opposed to industrial) mortgage-backed securities before the 2008 subprime-driven Wall Street crisis. S&P, the only credit rater targeted by the feds in this manner, after again was accused of going simple in grading securities and concealing conflicts of interest to win the affection of banks that concern the investment autos. The Justice Division has denied S&P's complaint that it was singled out by the Obama administration due to the fact of its downgrade of U.S. debt in 2011. The government sought as much as $five billion in civil penalties in this case, and a trial is tentatively scheduled for September.

And what did deal-structuring cows have to do with all this? In one of the most notorious e-mails to surface from the 2008 economic crisis, an S&P analyst told a co-worker that investments could be "structured by cows" and nevertheless get rated favorably. The e-mail became a symbol of laxity at S&P and all through the ratings enterprise. Right after all, the implosion of mortgage-backed securities rubber-stamped with "AAA" ratings helped set off the Wall Street credit crisis and a near-depression. When denying fraud or any type of civil liability, S&P has apologized repeatedly for failing "to totally anticipate the quickly deteriorating conditions in the U.S. mortgage market throughout that tumultuous time," as a spokesperson once phrased it to me. But is not that specifically what a rating agency is supposed to do: anticipate altering situations to defend investors?

 

Back to January 2015 Archive

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