One man's Free Speech is another man's fraud?

February 5, 2013 10:25 AM

US Justice Department suing Standard and Poor's over a "scheme to defraud investors" before the financial crisis. More details on these recent developments from The Tech online edition here, which notes: "For many years, the ratings agencies have defended themselves successfully in civil litigation by saying their ratings were independent opinions, protected by the First Amendment, which guarantees the right to free speech. Developments in the wake of the financial crisis have raised questions about the agencies’ independence, however." Reuters opts to let S&P break the news for themselves here.
posted by saulgoodman (48 comments total)

S&P is going to get wrecked.
posted by Windopaene at 10:37 AM on February 5, 2013

so Obama is ready to take on Wall St finally in his second term?

No, that policy was set when they didn't nationalize the TBTF banks.
posted by ennui.bz at 10:38 AM on February 5, 2013 [1 favorite]

Going after S&P seems like a pretty big move either way.
posted by saulgoodman at 10:40 AM on February 5, 2013

Civil charges and fines against a non-financial industry entity (S&P is owned by McGraw-Hill) - the only surprise here is that they still feel the need to pretend to be delivering justice for the crash.
posted by ryanshepard at 10:47 AM on February 5, 2013 [5 favorites]

There's a little more worth pull-quoting here:

More than a dozen state prosecutors are expected to join the federal suit, and the New York attorney general is preparing a separate action. The Securities and Exchange Commission has also been investigating possible wrongdoing at S&P.

posted by saulgoodman at 10:48 AM on February 5, 2013

Standard & Poor Judgment.

Regarding the title: Does the First Amendment cover lying in the course of doing business? Wouldn't that invalidate every law regarding misleading advertising (as weak as they are)?
posted by oneswellfoop at 10:50 AM on February 5, 2013 [1 favorite]

Feb. 5 (Bloomberg) -- Standard & Poor’s employees joked
about the company’s willingness to rate deals “structured by
cows” and sang and danced to a mock song inspired by “Burning
Down the House” before the 2008 global financial collapse,
according to a U.S. government lawsuit.
Two S&P analysts in April 2007 discussed the company’s
model for collateralized debt obligations, with one messaging
that a deal was “ridiculous” and that S&P “should not be
rating it,” according to the complaint filed yesterday in
federal court in Los Angeles.
“We rate every deal,” the other analyst said in an
instant message, according to the government filing. “It could
be structured by cows and we would rate it.”

[...]

In March 2007, an analyst wrote mock lyrics to the tune of
“Burning Down the House” by the rock group Talking Heads.
According to the complaint, it began:
“Watch out / Housing market went softer / Cooling down /
Strong market is now much weaker / Subprime is boi-ling o-ver /
Bringing down the house.”
The government said the analyst later sent a video of
himself singing and dancing the first verse “before an audience
of laughing S&P co-workers.”
posted by Riton at 11:01 AM on February 5, 2013 [1 favorite]

oneswellfoop: A roundup of recent SC rulings on the subject of lying in commercial speech.

See also: Lying as Protected Speech.
posted by saulgoodman at 11:04 AM on February 5, 2013

Regarding the title: Does the First Amendment cover lying in the course of doing business? Wouldn't that invalidate every law regarding misleading advertising (as weak as they are)?

Well that's the grounds for the suit. The defense in the past has been "hey we were wrong, we were honestly offering an opinion, and we f'ed up". This case is explicitly accusing S&P (and moody's eventually) of dishonestly offering views that their own work showed to be wrong. That's what has to be proved in court.

I wonder when they'll file on Moody's?
posted by JPD at 11:05 AM on February 5, 2013 [2 favorites]

Yeah, freedom of speech does not equal freedom to commit fraud by way of that free speech.
posted by mullingitover at 11:06 AM on February 5, 2013

Forgive my layman's take on this, but isn't this just classic blame shifting? S&P issued the bogus ratings, but S&P didn't sell the worthless investments. It's the big banks that actually made out like bandits on this, isn't it?
posted by ob1quixote at 11:08 AM on February 5, 2013

In March 2007, an analyst wrote mock lyrics to the tune of
“Burning Down the House” by the rock group Talking Heads.
According to the complaint, it began:
“Watch out / Housing market went softer / Cooling down /
Strong market is now much weaker / Subprime is boi-ling o-ver /
Bringing down the house.”

That barely even scans. Hanging's not good enough for 'em.
posted by Faint of Butt at 11:10 AM on February 5, 2013 [3 favorites]

S&P enabled the big banks to sell what they sold. If they didn't rate the securities AAA the market would have been dramatically smaller, the required yields would have been higher and the economics of the whole thing would have been different.
posted by JPD at 11:11 AM on February 5, 2013 [4 favorites]

But did they do anything illegal? Egregiously irresponsible and more than a smidgen evil, should be taken out an horsewhipped, but is there an actual court case there?
posted by sammyo at 11:15 AM on February 5, 2013

Finally, glad the gubmint took the time to build a case. Its not all the culpable, but I think the most criminally and provably so.
posted by sfts2 at 11:16 AM on February 5, 2013

Forgive my layman's take on this, but isn't this just classic blame shifting? S&P issued the bogus ratings, but S&P didn't sell the worthless investments. It's the big banks that actually made out like bandits on this, isn't it?

I think it's more of a classic 'everyone's guilty' story.

The rating agencies wanted to rate deals to earn $.
The bankers wanted to sell things they didn't understand or even thought were nuclear to earn $.
Bill Clinton's admin deregulated everything because they thought it would help everyone to buy their home (it did) and didn't see the downside.
Alan Greenspan lowered the interest rates because he thought the economy needed a boost.
People who couldn't really afford their mortgage payments took them out anyway because they thought they could probably sell their home at a profit or refinance in a few months (and also because the mortgage lenders didn't do their jobs)

So yeah, pretty much everyone takes a share of the blame.
Now in terms of morality issues, some of these parties, I think, definitely deserve a special kind of hell. I'll let you decide which ones.
posted by Riton at 11:19 AM on February 5, 2013 [1 favorite]

But did they do anything illegal?

Well, that's the contention. I suspect that they've singled out S&P because they've got something concrete, although the whole Megaupload debacle gives me pause there.
posted by ChurchHatesTucker at 11:20 AM on February 5, 2013

But did they do anything illegal?

Well, if they're being sued by the US justice dept, then someone thinks so.

I think the rating agencies bear a lot of responsibility- they basically worked with the banks to construct fantastic creations that could be rated AAA. Essentially, they collaborated in hacking their own rating system.

Also, as someone pointed out here before, they are private corps whose function is written.into law - pension funds can only buy stuff that's given good ratings. But then read any of their reports and there's a big disclaimer saying do not act on this info, its just opinion.

A big mess, and too powerful.
posted by memebake at 11:25 AM on February 5, 2013

Forgive my layman's take on this, but isn't this just classic blame shifting?

Imagine you hired a home inspector to inspect a house you were about to close on, and after he crawled under it to inspect the foundation, he came back out with a glowing report that everything looked just fine structurally.

But then, as soon as he drove away, he got on his cell phone and called up his buddy, the Realtor, to joke with him about how the house he just inspected was going to collapse any second now, so he'd better close the deal quick.

That's kind of what S&P is being accused of, in laymen's terms, as I understand it.
posted by saulgoodman at 11:27 AM on February 5, 2013 [9 favorites]

I kind of wish they were going for criminal (conspiracy?) charges, but I guess Big Textbook is just too powerful.
posted by RobotVoodooPower at 11:29 AM on February 5, 2013

Ah, yes, free speech. "No, friends, this one won't take over your house like the high-speed vibrating clocks."
posted by Mental Wimp at 11:39 AM on February 5, 2013 [1 favorite]

I suspect that they've singled out S&P because of the whole "downgrading the US govt" thing.
posted by Slothrup at 11:42 AM on February 5, 2013

People who couldn't really afford their mortgage payments took them out anyway because they thought they could probably sell their home at a profit or refinance in a few months (and also because the mortgage lenders didn't do their jobs)

In "fair and balanced" land this gets special billing. But it is disingenuously stated. Most people who took out these mortgages were at the lower end of the economic spectrum and in any event didn't buy and sell homes every day, and so they relied on what the real estate sellers and mortgage companies were telling them about these mortgages and real estate prices. There was a huge information imbalance in those transactions, and blaming the customers for relying on the people with superior knowledge kinda stinks.
posted by Mental Wimp at 11:43 AM on February 5, 2013 [2 favorites]

I wonder when they'll file on Moody's?

As soon as they learn that the two were colluding on pricing structured instruments.
posted by digitalprimate at 11:47 AM on February 5, 2013

But did they do anything illegal?

Well, if they're being sued by the US justice dept, then someone thinks so.

But, it's the US JUSTICE department, they are not trying to send these folks to the big house, they're suing them. Maybe there's a better chance than if there was a MiFi homeowner suit but still no one will be going to jail. At the worst it's a big fine. Certainly not so big that it'll shut them down, maybe it'll reduce bonuses one year someday if it exhausts appeals.

I have not looked at these posts in any detail but could this be more of a PR move? Many of us righteously indignant cry, "why are no bankers in jail", this might just be something to point at during press conferences?
posted by sammyo at 12:07 PM on February 5, 2013

I wonder when they'll file on Moody's?

Either waiting to see the result of the S&P case, or Moody's already settled. From the NYT:

Settlement talks between S&P and the Justice Department broke down in the last two weeks after prosecutors sought a penalty in excess of $1 billion and insisted that the company admit wrongdoing, several people with knowledge of the talks said. That amount would wipe out the profits of McGraw-Hill for an entire year. S&P had proposed a settlement of around $100 million, the people said.

S&P also sought a deal that would allow it to neither admit nor deny guilt; the government pressed for an admission of guilt to at least one count of fraud, said the people. S&P told prosecutors it could not admit guilt without exposing itself to liability in a multitude of civil cases.

Maybe Moody's cut a better deal - $1 billion but no public wrongdoing.
posted by kithrater at 12:28 PM on February 5, 2013 [1 favorite]

Actually, this might be a really good shot at bringing criminal charges. The biggest hurdle for the prosecutors of any criminal wrong-doing is discovery and evidence. They have to subpoena documents and don't know what they are looking for. So you file a civil suit, and get to look in the dirty laundry basket rather than digging through the dumpster. And then, when they can't provide the records to exhonorate themselves, because, you know, they deleted the e-mail chains implicating themselves, you get them for federal fraud charges, because financial institutions are required to keep records of all communications for x number of years or something. Boom, conspiracy to commit fraud as well, opening them up to be bled out by individual lawsuits from clients and other contract holders.

Or at least, I hope they are smart enough to do that.

Also, buy out the tech guys. Seriously, they are probably way underpaid for the work they are doing.
posted by daq at 12:33 PM on February 5, 2013 [1 favorite]

That took forever. Also, previously.
posted by exogenous at 12:34 PM on February 5, 2013

Hadn't seen an exact number put on the civil suit yet, but Reuters is now reporting the DOJ is seeking $5 billion in damages. For scale, that's nearly as much as the company's entire annual revenue in 2011 according to their published info (actually, that may be McGraw-Hill's total revenue--not sure).
posted by saulgoodman at 12:52 PM on February 5, 2013

I suspect that they've singled out S&P because of the whole "downgrading the US govt" thing.

Is U.S. lawsuit against S&P retaliation? It seems clear that Moody's and Fitch are equally guilty in this. If the DOJ has some legitimate reason for singling out S&P they'd better make it known soon, before the public loses what it has of the belief that they couldn't possibly be quite that blatantly corrupt in such a high-profile way.
posted by sfenders at 1:20 PM on February 5, 2013

They've made it public. They started the investigation into S&P before the investigations into the other two agencies and so it is further along. The investigations into the other two agencies are in progress. I fully expect lawsuits against both other agencies to follow.
posted by Justinian at 1:52 PM on February 5, 2013

The investigations into the other two agencies are in progress.

That'd be a relief, but I did search before commenting and didn't find any mention of this in the news. Would you happen to have a source?
posted by sfenders at 2:06 PM on February 5, 2013

I heard them say it on NPR yesterday but don't have a source on the internet to which I can point. So you can decide how much stock to put into something said on NPR.
posted by Justinian at 2:18 PM on February 5, 2013

S&P is going to get wrecked.

Yer all such optimists! It will be slaps on the wrist all around, and then bizness as usual.
posted by BlueHorse at 2:59 PM on February 5, 2013

saulgoodman: "Imagine you hired a home inspector to inspect a house you were about to close on"

Unfortunately, your analogy is flawed. While it's clear the home buyer defrauded in your analogy, it's only because you hired the inspector and paid them.

It's more like Bob buys a house from Sally, only after receiving assurances from her cousin Vinnie, an inspector, that this is a AAA rated house. Also most of the other buyers in the housing market are legally required to buy only homes with a AAA rating, and Vinnie is formally, legally recognized to bestow ratings. So clearly there's a huge incentive for the Sally and Vinnie to collude. The question is, why would you, knowing the structure of the ratings market, give any credence to what Vinnie has to say? You should be hiring your own inspector, and if you're buying this home with a loan, the lender generally demands it.

Unfortunately, this analogy also leaks into the real world. There's many stories of inspectors favored by subprime loan shops, for their ability to approve every deal sent their way. At least you paid them for the sham inspection, and whether your home is underwater depends more on rent levels than leaky faucets.
posted by pwnguin at 11:34 PM on February 5, 2013 [1 favorite]

So if S & P loses and McGraw Hill loses 1+ years of revenue, that means huge bonuses for all of the executives involved, right?
posted by double block and bleed at 6:03 AM on February 6, 2013

The question is, why would you, knowing the structure of the ratings market, give any credence to what Vinnie has to say? You should be hiring your own inspector, and if you're buying this home with a loan, the lender generally demands it.

But didn't many investors also buy "independent analysis" of these products from S&P? I can't imagine they didn't. S&P does sell its analytic products to investors. I'm sure there were plenty of disclaimers in the fine print, but that doesn't change the basic mechanics of how the scam worked.
posted by saulgoodman at 1:13 PM on February 6, 2013

saulgoodman: "But didn't many investors also buy "independent analysis" of these products from S&P?"

The most important phrase on that page is "Offered by Equity Research Services". As best I can tell, the closest their marketing materials comes to saying they advise people which CDOs to buy CDOs is asset allocation between equities and fixed income. Maybe they give more specific advice, I can't say I've ever paid for their services or know of anyone who has.
posted by pwnguin at 7:52 PM on February 6, 2013

Wow, that sentence went off the rails in revision. Strike out the second "CDO." Obviously 5 minutes isn't long enough an edit window ^_^.
posted by pwnguin at 8:07 PM on February 6, 2013

The Hypocritical Attack on S&P

First, the Obama-Holder Justice Department is suing only one of the three agencies, S&P. Did S&P engage in more egregious conduct than the other two? It did not. Did S&P’s conduct alone result in the mortgage meltdown and economic collapse? No. But S&P differs in one respect from the other two agencies: It was the only agency with the temerity to downgrade the debt of the United States Treasury. So, eighteen months to the day after the downgrade, the empire struck back with a vengeance. The $5 billion judgment it seeks is more than three times the book value of its parent company, McGraw-Hill.

Second, it was the federal government, aided and abetted by its partner, the Federal Reserve, that created the subprime crisis in the first place. Remember, the Community Reinvestment Act, originally enacted during the Carter Administration and expanded during the Clinton Administration, forced banks, in order to remedy “past discrimination” and promote “fairness,” to make lower-down-payment mortgages to people with poor credit. The Federal Reserve, first under Alan Greenspan and then Ben Bernanke, kept interest rates so low that malinvestments in single-family housing ballooned to unsustainable levels. The community and mortgage banks passed the bad paper they had originated on to Fannie Mae and Freddie Mac. Fannie and Freddie in turn sold it to Wall Street. There it was packaged, with Freddie and Fannie’s implied (now, unfortunately, actual) guarantee, and with “triple A” ratings from the three credit-rating agencies.

posted by the man of twists and turns at 6:34 AM on February 12, 2013

Really we're going to try to blame the CRA again? Don't you people ever get tired of being shown to be wrong with even the most cursory of examinations of the data? It's really really tiresome.
posted by JPD at 8:12 AM on February 12, 2013 [1 favorite]

EconLog: Difficult Facts

He has charts suggesting that the Netherlands and Norway experienced greater booms than the United States. In his book The Subprime Solution, he has a chart that shows London house prices rising faster than prices in Boston.

What makes this a difficult fact is that so many explanations of the house price boom are U.S/ specific. It is hard to argue that the Community Reinvestment Act or the repeal of Glass-Steagall are what account for the home price booms in Norway or Spain. In fact, Shiller's view is that bubble/contagion is the only theory that can account for the multinational nature of the home price boom.

When you can get Arnold Kling to call the CRA's non-influence a 'difficult fact,' and not much more, you can pratically smell the insulation burning.
posted by the man of twists and turns at 10:54 AM on February 13, 2013

Huh? That makes no sense. Are you saying that statement is supportive of blaming the CRA? Indeed - the entirety of that piece provides evidence that shows the CRA, and by extension FNM and FRE were amongst the least culpable of mooted causes of the bubble.

To be clear - I'm really confused. Are you supporting the idea that the CRA was a key driver of the bubble, or backing away from your prior statement.
posted by JPD at 11:56 AM on February 13, 2013

JPD: commonly, blockquotes are used to indicate that the words contained in them are from someplace else, like perhaps a link that is immediately above them. Perhaps my "insulation burning" comment requires more familiarity with Kling's work on EconLog as someone who would absolutely love to blame poor people and Congressional mis-regulation for the bubble.

Knowing this, can you point to "prior statement[s]" that I personally (not linked to) have made blaming the CRA for the housing bubble?
posted by the man of twists and turns at 12:40 PM on February 13, 2013 [1 favorite]

When you post something in block quotes with no other comment it is assumed that you are supporting that statement. So I would point you to the second paragraph of your "THe Hypocritical Attack on S&P" block quote.

Hence my confusion. In one block quote - it appeared you supported the idea that CRA was a meaningful cause, and in your next block quote you seemed to say the opposite.
posted by JPD at 12:46 PM on February 13, 2013

Remember, the Community Reinvestment Act, forced banks, in order to remedy “past discrimination” and promote “fairness,” to make lower-down-payment mortgages to people with poor credit.

How exactly did the big, bad gummint "force" banks to give out shaky loans again, Mr. Zawatsky? I don't think low down payments alone can do that as long as you do due diligence on vetting the mortgagee.
posted by Mental Wimp at 1:06 PM on February 13, 2013

When you post something in block quotes with no other comment it is assumed that you are supporting that statement.
I think you are alone in this.
posted by the man of twists and turns at 1:07 PM on February 13, 2013

This is ridiculous, that metatalk is not the same thing as what you did here. I acknowledge that it was miscommunication but the lack of clarity is entirely on you.
posted by JPD at 2:01 PM on February 13, 2013