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Uncle Sam Charges S&P with FRAUD!!!

Posted by Larry Doyle on February 6, 2013 9:28 AM |

“Fraud,” cried the maddened thousands, and the echo answered “Fraud.”

Fans of our national pastime are likely well acquainted with the classic poem, Casey At The Bat. In that well worn tale, the patrons of the game go home with heads bowed as their power hitter, that being the mighty Casey, fails to drive home the winning runs in the bottom of the ninth.

In similar fashion but in real life, the fans of the red, white, and blue team with USA adorned across their breast are also disappointed to date as justice officials have yet to swing at pitches seemingly thrown right over the plate. To what do I refer? Financial frauds emanating on Wall Street. Although our very real game is seemingly in the late innings, mighty Sam is in the process of swinging his bat as he charges the rating agency Standard & Poors with fraud.  About time right? 

The e-mail evidence would seem compelling in painting a picture of a rating agency conflicted by profit over principle. Would the following e-mails be viewed as smoking guns?

 Standard & Poor’s internal email, dated May 2004, re: Competition with Moody’s (We just lost a huge Mizuho RMBS deal to Moody’s …. * * * Losing one or even several deals due to criteria issues, but this is so significant that it could have an impact in the future deals.).

Standard & Poor’s internal email, dated August 2004, re: SF CIA: CDO methodology invokes reaction (We are meeting with your group this week to discuss adjusting criteria for rating CDOs of real estate assets this week because of the ongoing threat of losing deals. *** Lose the CDO and lose the base business – a self reinforcing loop.).

Let’s take a step back and think this through.

Is there any doubt that all the rating agencies were key players in the greatest control fraud of all time? No doubt, but what role did the rating agencies play? They effectively held the door and provided a degree of cover as those robbing the bank grabbed the big dough.

Do those bit players who hold the door and provide cover deserve to be pursued and brought to justice? Yes, they do but in real judicial systems, prosecutors will typically utilize these door holders for leverage in going after the bigger fish. If the door holders had e-mails of the sort referenced above going back as far as 2004, one can only imagine the volumes of e-mails that have been retained from those driving the car (i.e. the mortgage originators), those grabbing the dough (the bankers), and even the capos back at the social clubs (senior bank executives) who took the biggest cuts.

All of this leads us to question, why S&P and not the other door holders (Moodys and Fitch) and why now? The Wall Street Journal puts a very interesting spin on these questions in its lead editorial this morning:

 So why wasn’t a federal case made in 2008 or 2009 or 2010 or 2011 or 2012?

Might this fraud charge leveled now against S&P be payback? Really? Payback for what?

There are other disturbing questions related to the timing and the target of this federal civil prosecution. S&P’s attorney Floyd Abrams tells us that “things seemed to rev up in terms of the intensity” of the federal investigation after S&P’s historic downgrade of United States credit following Washington’s debt-limit fight in 2011.

Not exactly playing softball with that statement. All of which leads us to wonder about the very system of justice within the realm of financial frauds. What do I wonder? If Uncle Sam is supposed to protect us, then why does it seem that all too often the old man — in the persons of a wide array of pols from both sides of the aisle, regulators, and justice officials — seems to be a quiet and willing partner with those who robbed the banks in the first place? Why, in this case being brought by Uncle Sam against S&P, am I once again reminded of the following scene  . . .

Mighty Casey and The Sting are great literary and film clips but the problem here, folks, is the control fraud in which S&P was a participant but a minor one relatively speaking is REAL LIFE. We have paid and continue to pay the price for the frauds and the lack of meaningful justice delivered by Uncle Sam. How so?

True free market capitalism is on the ropes.

Navigate accordingly.

What do you think? Comments always encouraged and appreciated.

Larry Doyle

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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