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S&P Ratings: ‘You Didn’t Believe Us, Did You?’

Posted by Larry Doyle on April 23, 2013 7:37 AM |

What are the most important issues you face?

I imagine most would think that physical, mental, and emotional well being would rank highest on your list.

Imagine, then, the individuals to whom you went for independent and objective advice on these very personal issues were to inform you that their insights were, in fact, highly conflicted and that their proclamations and prescriptions were actually little more than “puff.”  You would probably be more than a little pissed off.

What about your financial well being? 

Can you imagine if individuals or entities proffering financial advice that has been perpetually presented as independent and objective were also exposed as charlatans offering perspectives that were also little more than “puff?”  Think you might be a little pissed off?

Well, not much surprises me anymore but in my Inbox entitled “You Cannot Make This Stuff Up,” I read a story this morning that relegates the entire credit ratings process on Wall Street to little more than a joke — and a bad one at that. How so? Let’s navigate an incredibly bizarre development in a case being brought by Uncle Sam against Standard and Poor’s. The WSJ reports:

Standard & Poor’s Ratings Services has long declared that its letter-grade ratings are independent and objective, part of a bid to allay concerns over its business model.

Standard & Poor’s, like all major credit-rating firms, is paid by issuers to rate the securities that they sell.

Regulators, lawmakers and investors have said the payment system presents a potential conflict of interest that could provide an incentive for Standard & Poor’s and its rivals to cater to bankers and other issuer clients.

But Standard & Poor’s , a unit of McGraw-Hill Cos., has long pushed back, saying its standards of objectivity and independence mitigate potential conflicts of interest.

Now, lawyers defending the company against the Justice Department’s recent civil lawsuit say that statements about independence and objectivity are “puffery” and were never meant to be taken at face value by investors. 

Not a lot of reason to read the rest of that article.

With that simple statement, the lawyers for S&P place its client, the “industry backed” credit ratings process, and all those involved in the frauds facilitated by phoney ratings into the pantheon of swindlers. How many trillions of dollars worth of securities rated by S&P were given a stamp of approval based upon a premise of independence and objectivity?  Let’s not give the folks on Wall Street or in Washington a pass here. The industry has utilized the imprimatur of independent and objective credit ratings to distribute a whole lot of overpriced offerings over the years.

As for Washington, you might have to look a long time in reviewing Dodd-Frank to see meaningful developments regarding reform of the credit ratings process. I will save you the time. There is nothing of real substance in there on this topic.

In conclusion, the statement made by S&P’s lawyer is the equivalent of throwing another log on the fire that is incinerating any sense of meaningful integrity within the Wall Street-Washington conspiracy.

Puff . . . puff . . . up in smoke!

You may want to do the same with any credit ratings that cross your desk from S&P and its industry brethren at Moody’s and Fitch.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

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.

  • Peter Scannell

    Well just look at Standard & Poor’s parent company, McGraw Hill, and their board’s recent seating of 13th director in what historically has always been a twelve director board. Sitting on both the Audit Committee and Leadership Development Committee is Charles Ed Haldeman Jr.

    This guy thinks he’s the Teflon Don – how apropos.

  • Peter Sivere

    The investment banks that represent their clients often negotiate back and forth with the rating agencies. The two sides work together to draft and negotiate ratings. That is a conflict. The same type of conflict when Bankers tell Research what to write in research reports.

  • Ed

    I am curious why investment bankers had to seek ratings for their securites in the first place? Who said? In a historical context, who said it was required? Was it a private sector decision to voluntarily seek a 3rd party evaluation? Did the bankers who sold securities want it or did the institutions buying them want ratings? Who decided to delegate the due diligence? Who said that would be fine? I think the roots of 3rd party analysis were valid and could’ve been a viable sector of a competitve private market. However something tells me someone in government one day noticed that something worked well for a few participants so made it the law of the land, thus removing any need for competition while at the same time adding heeps of complacency…. In other words heeps of unintended consequences… Sounds like what our friends have done with education, healthcare etc. I wish i had time to do the research but even without it i think i’m close.






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