Of course, the catch in all of this is that the US is accusing S&P of “knowingly” understating the credit risk of some instruments. The reasoning:
“S&P’s desire for increased revenue and market share in the RMBS and CDO ratings markets led S&P to downplay and disregard the true extent of the credit risks posed by RMBS and CDO tranches in order to favor the interests of large investment banks and others involved in the issuance of RMBS and CDOs who selected S&P to provide credit ratings.”
Which all sounds very dark and conspiracy theory. And, honestly, it requires far too much community of effort.
Occam’s razor suggests that the real reason for the mistakes was that ratings for these instruments were needed quickly, happened often, and designated to a lackey who just used the same excel spreadsheet as last time. Said lackey checked that the spreadsheet gave numbers within range, and concluded “AAA” at the bottom of the form he/she submitted to his/her manager. And in his/her head, the lackey is saying:
“I have zero idea what a CDO is really. Or what these assets are that it groups together. Or how to measure them. But I remember that my finance professor said that you diversify risks by holding different assets, and there are plenty assets here, so it must be fine. Also, the guy who did this last time probably knew what he was doing. And my manager will send it back if it’s wrong. And I can’t really explain the problem if there is one, and…OMG – she MESSAGED. And I TOTES feel like getting coffee right now. Let me just send it. I’m sure it’s fine.”
Maybe that’s too cynical. But lackeys are inexperienced, badly paid, and there under duress. Their real motivation is fear, not greed. And fear floods you with adrenalin and all you want to do is run*. Adrenalin is the enemy of rational thought. #Fact.
S&P responded with:
“A DOJ lawsuit would be entirely without factual or legal merit. It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market, including U.S. government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained.”
Which is paraphrased to: “it’s fine to be wrong if we’re all wrong together”. Oh, and also, they’re claiming that they have a first amendment right to an opinion.
The observation I would make to that final excuse:
- Pension Fund regulations make reference to rating requirements;
- Which gives S&P a reason for their economic existence; so
- Can you really claim that your opinion should be free of consequence if you’re using it to your benefit?
*Fright then flight.