Lessons from the S&P Lawsuit — Just Not The Ones Learned at the Real Press Conference
The United States government, joined by quite a number of states, has sued Standard & Poor’s Corporation for doing a very bad job of rating various kinds of mortgage-backed security during the housing crisis.
There are some lessons here but you will not learn them listening to the press conferences at which Eric Holder and the various state attorneys general line up to extol their virtues.
Cynics may wonder how the news conference order of pontification was determined. Electoral votes delivered for the president? Money raised within each state? Lottery? Auction? However they jostled for position, the level of bloviating by these governmental legal officials was heroic.
In my alternative universe, where truth serum has replaced bottled water, here are some of the questions that should have been asked and the answers that should have been given.
Q — How did you decide to sue for $5 billion?
A — It was very important to be sure that S&P would not be tempted to settle the case because the whole point is to keep the controversy alive for as long as possible. If we had chosen a smaller number, the case might inadvertently have gone away and we would not have received the desired publicity.
Q — If you were concerned about Wall Street behavior, why didn’t you sue Goldman Sachs, Morgan Stanley, Citicorp or JP Morgan?
A — Those firms contribute to our campaigns. How often do you hear about S&P lining our pockets?
Q — Do you think the rating agencies will begin to contribute to politicians in the future?
A — No, they are pipsqueaks and they don’t make nearly as much money as the investment bankers.
Q — Is this lawsuit simply a way for federal and state governments to pretend to attack Wall Street?
Q — Do you think this will deflect attention from the Community Reinvestment Act that required financial institutions to make loans to people who could not pay them back?
A — Well, we certainly hope so.
Q — What is an NRSRO?
A — I haven’t the smallest idea.
Interjection from someone who knows what he is talking about: the acronym stands for Nationally Recognized Statistical Rating Organization.
Q — Why are NRSRO’s important?
A — I haven’t the smallest idea
Interjection from someone who knows what he is talking about: because they are written into several federal laws requiring ratings from firms like S&P to permit pension plans, banks and other fiduciary investors to own particular securities.
Q — If your very own federal laws require ratings from S&P and if the firm has qualified as an NRSRO according to the Securities and Exchange Commission, how can you now turn around and say they are inept?
A — I don’t think I like your tone here.
Q — Either they are good at what they do, as the SEC said they were or they are not as you say they aren’t, which is it?
A — We are not taking any more questions from you because you are detracting from the image we are trying to create.
Q — In the summer of 2011, S&P downgraded treasury bonds from AAA to AA+. The other rating agencies did not. Did this have any effect on your decision to sue one firm but not the others?
A — Actually, that did not matter at all because there are no real investors who buy treasury bonds and the Federal Reserve Board does not really care how bad our credit is. What did make us mad was S&P implying that we were too stupid to get out of our own way because we could not even submit a budget let alone balance one. Don’t you think that was reason enough to sue them?
Q – What does Barney Frank have to say about any of this? He has had a pretty heavy hand in some of the laws that helped create the problem.
A – I don’t know. He seems to have bolted.
After each hometown Attorney General had his or her opportunity to repeat the same silly answers to the same silly questions for the local television audience, a spokes flack for S&P took the podium.
Q — How did you get so bamboozled by the big Wall Street investment banks when you rated the crappy deals they sent over to you?
A — They are much smarter than we are.
Q — Why is that?
A — Because they pay people about 10 times what we do. Nobody with half a brain would come work for us when they could go work for them.
Q — Well some of your people seem to think that your rating decisions were ill advised and, unfortunately, they said so in “colorful” emails.
A — Yes, those are among the smartest people we have. If I gave you a stack of 100 resumes, half from Goldman Sachs and half from S&P (with the identifying information blacked out) you would have no difficulty at all putting each one in the correct stack. Everyone they have is smarter than anyone we have. We are totally overmatched.
Q — Were your computer models incorrect?
A — How do I know? The investment banks gave them to us.
Q – Did you do any quality control tests on the models they gave you?
A – What are those?
Q – What happens if you lose?
A – We go out of business.
Q – Then who rates the bonds that have to be issued to help the economy grow?
A – Stupid like a fox, aren’t we.