S&P’s Ratings ‘Puffery’

I’m not sure if this is court room desperation or fact (ok, it’s fact), but credit rating agency Standard & Poor’s (S&P’s) launched an interesting defense in court, against the government’s civil lawsuit seeking $5bn on grounds that S&P defrauded investors during the financial crisis by slapping on “AAA” ratings on piles of dung (a.k.a. mortgage-backed securities).

S&P, in its defense, stated that any reasonable investor would not have relied that much on S&P’s ratings, which were mere “puffery” (in there own words).

“They’re seeking to blame the entire financial crisis on Standard & Poor’s,” S&P lawyer John Keker said in court. “Those generic statements don’t make a scheme to defraud. For a scheme to defraud, there has to be a specific intent to harm the victim, in this case the investor.”

Well, Keker does have a point. And the entire financial crisis probably shouldn’t be laid on S&P alone. There are other ratings agencies (Moody’s, Fitch Ratings), and of course the banks, mortgage finance companies, shady mortgage brokers, and not to mention the U.S. government itself, should all share the blame.

But I digress. Getting back to S&P–the fact that S&P ripped its own work (which is its own bread and butter business) in public is pretty eye-opening (and funny). But believe it or not, S&P is absolutely correct.

Professional investors don’t trust the credit ratings. And most Wall Street banks, institutional investors, and funds know that the ratings are hogwash. Sure, a “CC+” rated security might be worst off than a “AAA” rated security, relatively speaking, but no investor would rely solely on those ratings without doing their own homework first.

So in the end, I don’t think S&P intended to deceive investors. What it did intend to do was get as much money as possible from their clients (the issuers who hired them to rate their securities), by slapping on the “AAA” stickers as quickly as possible.


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