Will the S&P Fraud Case Be Just Another Wrist Slap for Financial Alchemy?

The Department of Justice filed a civil lawsuit against Standard and Poor's for fraud.  Will the DOJ finally nail credit rating agency Standards and Poor's for slapping AAA ratings on rigged CDOs backed by mortgage toxic waste?   Or will justice be just another slap on the wrist?

S&P engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs). The lawsuit alleges that investors, many of them federally insured financial institutions, lost billions of dollars on CDOs for which S&P issued inflated ratings that misrepresented the securities’ true credit risks. The complaint also alleges that S&P falsely represented that its ratings were objective, independent, and uninfluenced by S&P’s relationships with investment banks when, in actuality, S&P’s desire for increased revenue and market share led it to favor the interests of these banks over investors.

 Dealbook quotes insiders saying the reason the suit happened at all is because S&P wouldn't settle for $1 billion and admit anything.   Instead, S&P wanted $100 million and to claim they didn't do nothing wrong, sir...

The DOJ is bringing out the big state guns to join in on the lawsuit and claim they have identified $5 billion in actual losses attributable to S&P's AAA credit rating slaps on worthless garbage.

Attorney General Eric Holder was joined in announcing the filing of the civil complaint by Acting Associate Attorney General Tony West, Principal Deputy Assistant Attorney General for the Civil Division Stuart F. Delery, and U.S. Attorney for the Central District of California André Birotte Jr. Also joining the Department of Justice in making this announcement were the attorneys general from California, Connecticut, Delaware, the District of Columbia, Illinois, Iowa and Mississippi, who have filed or will file civil fraud lawsuits against S&P alleging similar misconduct in the rating of structured financial products. Additional state attorneys general are expected to make similar filings today.

Some of the details in the filing have been documented since 2008.  Still, what S&P did is so outrageous, it deserves repeating:

From 2004 to 2007, the government alleges, S&P was so concerned with the possibility of losing market share and profits that it limited, adjusted and delayed updates to the ratings criteria and analytical models it used to assess the credit risks posed by RMBS and CDOs. According to the complaint, S&P weakened those criteria and models from what S&P’s own analysts believed was necessary to make them more accurate. The complaint also alleges that, from at least March to October 2007, and because of this same desire to increase market share and profits, S&P issued inflated ratings on hundreds of billions of dollars’ worth of CDOs. At the time, according to the allegations in the complaint, S&P knew that the quality of non-prime RMBS was severely impaired, and that the ratings on those mortgage bonds would not hold. The government alleges that S&P failed to account for this impairment in the CDO ratings it was assigning on a daily basis. As a result, nearly every CDO rated by S&P during this time period failed, causing investors to lose billions of dollars.

Nearly every CDO rated failed is really damning. That is systemic fraud if ever we saw it.

The DOJ investigation code name was alchemy and that's about right when it comes to CDOs and many derivatives models.  Dealbook claims the heart of the suit are computer models used to rate the CDOs.  We overviewed the bad computational models of CDOs, as well as the invalid mathematical models behind them previously.  Unfortunately the case does not put  computational models and mathematical formulas on trial.   Dealbook reports the focus is on software updates.  Oh gez, if this is true, Microsoft and Linux are guilty as sin.

We read the case but there is so much more to it than claiming someone didn't update their software. In fact that does not seem to be the DOJ focus.  The complaint is 124 pages, available here and mentions many sources of direct evidence, including phone, email and even S&P strategic objective statements.   All clearly document S&P's brazen fraud.

The DOJ reports some astounding figures in the amount of money involved.  From 2004-2007, S&P rated $2.8 trillion residential mortgage backed securities (RMBS) and yet another $1.2 trillion in CDOs.  For each CDO rated, S&P got $50,000, unless of course the customer didn't care for the rating, then S&P got way less in fees, as in pennies on the dollar.  The DOJ complaint reads like a get rich quick scheme.  The good business of lying really pays, and the profits to be made are off the charts.

In 2007, rating CDO's generated $203 million in ill gotten gains.  In 2006 the S&P MBS rating division made $243 million.

While there is clearly $5 billion on the table from the complaint, we believe S&P will settle and probably for the $1 billion originally demanded or less.  That would still be one hell of a profit for S&P, even with the settlement fees being a glorified 20% kickback to the government.

Will S&P ever admit wrong doing?  We doubt it.  Odds are they will scapegoat a few lower level employees, blame the programmers for bad software and throw a few mathematical modelers to the wolves.

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Comments

Get Corzine, Dimon, Blankfein, etc. in Leavenworth

S & P, it's just a show to show the DOJ, six years after the crash, is really doing something, no, really. It's just to make Holder, a carryover into Obama Bankster Administration II, look like he's not completely in the bag for Wall Street.

This case is not as easy to prove as other cases involving Wall Street, and there's a reason it's being pursued. If the DOJ has any difficulty (and it will - it's not impressive), they will say, "Look, it's hard to prove financial crimes, despite 500 AUSAs and FBI Special Agents, so leave us alone, we tried and got a decent settlement." So they will struggle, maybe get a settlement, and then basically ask everyone else to leave them alone, the DOJ and others tried and semi-succeeded or semi-failed.

However, this is the important part, look at who the DOJ hasn't gone after, despite mountains of evidence and actual testimony on the record. Corzine? I mean really, talk about endless conflicts of interest, blatant theft, blatant illegal wire transfers, etc. Also, Dimon and JP Morgan were involved in that. DOJ - NOTHING. JP Morgan and the White Whale? Nope. JP Morgan and Goldman Sachs involving aluminum price manipulation that filters down to Coke and consumers? They actually own warehouses to store aluminum, what do i-banks own factories to store aluminum for other than to keep it off the market? Nope. Investment banks manipulating other commodities (e.g., oil)? Nope. Also, how about LIBOR manipulation? Talk about easy case with hundreds or thousands of possible new inmates and trillions in losses? How many banks were involved in that? How many hundreds of billions could be taken from the criminals in that long-running crime?

Who went to prison from HSBC, Standard Chartered, Wells Fargo (Buffett's bank), and other banks for laundering money for terrorists and other criminals? No one. In fact, where are those criminal prosecutions? Nowhere because they never happened and were settled quickly in civil actions. Pathetic.

And off Wall Street, how come Murdoch is still walking free? Phone hacking, FCPA, police bribery, tampering with evidence, etc. Another easy case for Holder or any AG in any state with jurisdiction. How about insider trading by Buffett with access to Obama and bailout plans near the time he buys stocks or deals with Wall Street players like Goldman Sachs, etc.? But these are all contributors to the right politicians. They meet and are meeting with those in charge. They dictate who gets bailed out and who doesn't.

S&P? Just a sacrificial lamb that won't affect anything, it's to appease the folks that think, "Gosh, Obama sure does say he is taking on corruption, but he's meeting with Blankfein, and Corzine's still free, and Dimon's got the President's ear, hmmm. . ."

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no one has gone to jail for the housing/financial crisis

I agree and Corzine while minor in comparison to the financial crisis has to be the most "insider" off the hook there ever was.

This is why at the end of this article I suspect this is all to push up the settlement fine. This won't even make it to trial and it's civil so no one will go to jail.

In the DOJ filing, executives are left anonymous and called by letter, executive A, B, C.

The guilty are named. Even when there are memos, emails, witnesses, paper trail and even corporate strategic documents nobody goes to jail.

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Steal one dollar, you're a criminal. Steal billions . . .

Steal one dollar, you're a criminal. Steal millions, you're the best and brightest. Steal it all, you're a bankster running global governments.

My apologies to Jean Rostand from whom I modified the famous "Kill one man, and you are a murderer . . ."

The theft of one dollar is a crime, the theft of billions is government protected banksterism. (Modification of Stalin's quote, with no apologies to Stalin).

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offtopic question

Right, policy proportionate to the situation at hand, esp. policy based on fact is dead in D.C.

Did you figure out how to write an Instapopulist? If not, I need to know where the bottleneck is so I can fix it.

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good deal

For folks reading at home, the site has a powerful new feature where any registered user who is sane can write up a pretty sophisticated post under the Instapopulist.

The navigation menu will be changing and from your comment looks like i should change it to the EPer menu, or user menu. Many things broke (obviously) on the site upgrade but the good news is the page load speed was cut by 66% and the site does display in mobile and scale to devices. (yea). That was the huge reason for the upgrade so people could read and use the site on mobile devices, plus give a space for anyone to "speak their mind 2 cents at a time"

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These idiots are breeding Robespierres, and they don't care

It's amazing, absolutely amazing. Timmy "Turbotax" Geithner, part-and-parcel of idiocracy at the top levels, is moving on to the CFR before his inevitable gig with Government Sachs or Citi or Blackrock. The man can't figure out his own taxes, gets hired to be in charge of our taxes, and then gets another gig before he moves on to making six or seven figures. Hey, fellow Americans, see Tim isn't "overqualified," he's incompent, corrupt, and connected, that's why he gets jobs and we can't.

What a complete mess. Meanwhile, in Greece, Spain, and Italy, people are losing their minds over actual HUNGER, the kind we thought only Africa experienced. Oh, that's right, the same corruption that helps destroy African nations is now in Europe and America courtesy of politicians, kleptocrats, and other players. Can we stop sending our $ through the World Bank and the IMF to other nations (we are the biggest funders of course) and keep it here? Can we maybe keep some $, stop giving it away so nations that hate us get free weapons, and feed and clothe American citizens that went to school, served their Nation, and understand the pledge of allegiance (and no, plutocrats and banksters, it doesn't involve "profit" or "pissing on my fellow Americans"). Because while corrupt officials get rich or build their 1%er resumes working at the World Bank, IMF, CFR, and UN before moving on to Goldman or UBS, we are actually starving right here in the Western world. What a train wreck. I wonder, how long before the National Razor comes back out in Paris? Tick tock, tick tock.

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US Attorneys looking at Lance Armstrong - dbags say what?

Awesome, because Lance Armstrong destroyed the global economy. The same way steroids in baseball corrupt entire governments and own the feds, EU, etc. Next on the list, big soda - it's evil and Bloomberg doesn't like it one bit. Our taxpayer dollars funding another distraction.

If someone has an IQ over 90, are they presumed overqualified for an Assistant US Attorney position? US Attorney position? AG spot? CEO of an investment bank? If they give a crap, will they be homeless under a bridge in LA or NYC? Blankfein's laughing his lazy, incompetent, puffy ass all the way to his TV that's broadcasting CNN while avoiding anything resembling a bicycle seat as he sits his ass in his newly bought mansion (courtesy of us). Notice how fast the feds jumped on this bike case, but they simply must take years and years to decide they don't want to prosecute banksters and Murdoch and others that pull the strings - hmmm, how odd (just kidding).

Oh sweet mockery of justice, how many FBI Special Agents and Assistant US Attorneys were involved in that Kardashian case of photos being sent that Kim didn't approve of? And welcome to the Banana Republic of the USA. Avoiding the real crime at all costs and only for $70,000 - $225,000/yr. per attorney (pre-bankster defending careers of $1 - $10 million/yr). Transparency International, WTFU, this is corruption, BS criminal cases that don't go after the state-destroying issues. Because when it comes down to lying, doping bike riders vs. big banksters that steal, manipulate, perjure themselves, bribe, break RICO and FCPA laws, cause suicides, launder money for terrorists and criminals, forge documents by the 10s of 1,000s, manipulate stocks and commodities, ruin national governments, etc., we see what's important - bike riders of course!

Check please.

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anything that doesn't matter will be prosecuted

Netflix has a original show, House of Cards and it's right up our entertainment alley. It's about the incredible corruption and sociopathic state of Washington. Anyway, contained within the script they show how corrupt the news media is.

Armstrong as you point out is a distraction. Who gives a rats ass about chemical cocktails for Athletes although it's a great story to fill up airtime and distract from 20 million people needing a job.

Financial obscenities are executive worship and billionaire idols. The feudal lords of our time and all come out to kiss the ring of the King.

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worse than that, way worse

The press posts pictures of cats, pictures of dogs which look like people and pot shot celebrity photos over investigative news. The problem, beyond lobyyists controlling the news, is real news does not pay.

You can get 1 million hits on a cut cat photo and 2,000 reads on an article talking about job creation. Sad, sad, sad.

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Distractions, just like the band on the Titanic

Corporations that own the media need to make everyone with any kind of income (and a job) to feel that they can spend that cash. Too much PBS, too much ZH, too much EP, any stories of families being destroyed, too much reality would get people pissing in their pants and saving every nickel they collected while possibly demanding real change NOW. Most of the people visiting sites based in reality are those who are smacked with reality every day and look to fellow minds for comfort (e.g., downsized folks, debt-laden kids, people with open eyes and ears that don't buy false political paradigms).
Mass media creates the message, "good times are back," spend spend spend, and look, NYC penthouses are reaching high levels again, so that means Joe Average must be doing well (forgetting the fact lots of foreign corrupt $ buys luxury items and luxury goods never had any bearing on the middle of America).

And if you've got a job, even if you have 1 or 2 or 3 relatives long-term unemployed, their stories of misery and utter woe just bring the party down for many. Sure, the misery has been spreading from steel and autos to white collar and every sector now so no one is immune, age discrimination is rampant, college kids can't find jobs anymore, so the whole Nation is going Third World status. But the people keep creeping back to the dry spot on the Titanic, thinking if only those drowning people would shut up already the Titanic would float. Meanwhile, as long as the band keeps playing, things will hopefully work out. Distractions, distractions, meanwhile the rich folks that call the shots are nice and dry in the lifeboats. But everyone else thinks if they just keep the band playing, they won't drown like every other 99%er. If only they could be distracted and the drowning people would just shut up, all will be well, because everyone with $ and a job deludes themselves into thinking their skills are so unique, so special, their education and work ethic is so fantastic that they are irreplaceable. The ever growing number of drowning passengers respectfully disagree and should give anyone with a brain a moment of serious doubt.

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