One of the great myths that created the seeds of the financial crisis was that the ratings agencies–Standard and Poor and Moody’s–were “independent”. What a crock–the ratings agencies gave positive ratings to the crummy debt securities that were at the heart of what led to millions of people losing their jobs and they have been the water boys for the financial elite who peddled this crap. Now, we have a conviction of S&P: Guilty in a court of law.
So we are clear: The ratings agencies were complicit partners in building the pyramid of bad assets for one reason: profit and greed.
The judgement comes in a court of law in Australia. Per the Financial Times:
Standard & Poor’s misled investorsby awarding its highest rating to a complex derivative product that collapsed in value less than two years after it was created by ABN Amro, an Australian judge has ruled, in a landmark case that paves the way for legal action in Europe.In a damning verdict the Federal Court of Australia ruled S&P and ABN Amro, now owned by RBS, had “deceived” and “misled” 12 local councils that bought triple-A rated constant proportion debt obligations (CPDOs) from an intermediary in 2006
The court said a “reasonably competent” ratings agency could not have assigned the securities, which were described as “grotesquely complicated”, a triple A rating. S&P and ABN Amro also published information and statements that were either “false” or involved “negligent misrepresentations”, Justice Jayne Jagot found.
The 1,500-page ruling marks the first time a ratings agency has stood a full trial over a structured finance product. The decision will be closely studied by rival ratings agencies and also by investors and investment banks around the world.[emphasis added]
And in the Sydney Morning Herald it is clear this is just the first salvo against the corruption at S&P:
IMF Australia, a publicly listed company that funds large class-action lawsuits and financed the claim, said it is planning legal action in Amsterdam related to some 2 billion euros in CPDOs sold by ABN Amro and rated by S&P.
Now, the question is what will the Justice Department do? More than a year ago, as I wrote, the Justice Department was investigating “whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities”.
Truthfully, I have been arguing for a very long time that convicting the company without jailing the executives is not good enough. Financial penalties are, ultimately, paid for by the shareholders and consumers (in the case of banks)–while the executives continue to reap huge pay and benefits.
But, today, I’ll take this conviction of a corporate law breaker.