The Standard & Poor's building in New York.CHARLES PLATIAU/Reuters
Has there ever been a greater gift to prosecutors than the invention of e-mail? The answer would appear to be no, judging from some of the correspondence contained in the U.S. civil complaint filed on Monday against Standard & Poor's Ratings Service.
Once again, it makes for disturbing reading as S&P employees – like so many bankers before them – openly trash the investments they go on to endorse.
In their complaint, U.S. prosecutors allege that S&P knowingly defrauded investors between 2004 and 2007 by pledging that their ratings on complicated mortgage-backed bonds were objective and independent, when in fact they were anything but.
Consider the ditty penned by one analyst in early March, 2007, to the tune of Burning Down the House:
Watch out
Housing market went softer
Cooling down
Strong market is now much weaker
Subprime is boiling over
Bringing down the house
Hold tight
CDO biz – has a bother
Hold tight
Leveraged CDOs they were after
Going – all the way down, with
Subprime mortgages
Own it
Hey you need a downgrade now
Free-mont
Huge delinquencies hit it now
Two-thousand-and-six vintage
Bringing down the house
Minutes later, he asked colleagues not to forward the message "for obvious, professional reasons," but added, "If you want, I can sing it in your cube :-)"
Of course, sending dumb e-mails to your colleagues is not the same as fraud. But prosecutors allege that S&P went on to give sterling triple-A ratings to the very collateralized debt obligations, or CDOs, mentioned in the song, for months. And continued to do so even on the day they announced mass downgrades in July, 2007.
The complaint also features some choice conversations conducted by instant message.
Here are two S&P analysts charged with evaluating CDOs discussing in April, 2007, the defects in their ratings model:
Analyst 1: btw that deal is ridiculous
Analyst 2: I know right… model def[initely] does not capture half of the… risk
Analyst 1: We should not be rating it
Analyst 2: We rate every deal … it could be structured by cows and we would rate it
Analyst 1: But there's a lot of risk associated with it – I personally don't feel comfortable signing off on it as a committee member
Federal prosecutors had some tough words for S&P at a press conference on Tuesday announcing the civil charges. "It's sort of like buying sausage from your favourite butcher, and he assures you the sausage was made fresh that morning and is safe," said Tony West, a senior official at the U.S. Justice Department. "What he doesn't tell you is that it was made with meat he knows is rotten and plans to throw out later that night."
S&P, meanwhile, has said that it plans to "vigorously defend our Company against such meritless litigation."