In a First, SEC Warns Rating Agency It May Bring Financial Crisis Lawsuit - ProPublica
Though they’ve been faulted for their central role in the financial crisis, the major credit-ratings agencies have thus far weathered the fallout of the crisis with no sanctions from federal regulators and little more than a bruised reputation.
But that could change soon.
In a formal warning known as a Wells notice, the Securities and Exchange Commission informed credit-ratings firm Standard & Poor’s that it’s considering civil charges tied to the firm’s ratings of a 2007 mortgage-backed securities deal. It’s the first such warning to be given to a credit-ratings agency over matters directly related to the financial crisis.
The deal, known as Delphinus, was one of more than two-dozen collateralized debt obligations linked to the hedge fund Magnetar, whose role in creating and betting against risky CDOs was detailed in a ProPublica investigation last year. Completed in the summer of 2007, Delphinus was one of the last deals done by Magnetar and was underwritten by the Japanese bank Mizuho.
Details on S&P’s potential violations are still unclear. But last year’s Senate investigation of the financial crisis may contain some hints.
The report, which blamed inaccurate ratings as “a key cause” of the financial crisis, said agencies failed to do due diligence in grading securities and too often bent to the wishes of the banks that paid them. The report also flagged Delphinus as a “striking example” of the failures of ratings agencies, noting that the CDO was downgraded “a few months after its rating was issued.” Moody’s and Fitch, S&P’s main rivals in the United States, had also rated Delphinus and had to downgrade or withdraw those ratings after it went into default in 2008.
Senate investigators also released an internal S&P email chain in which analysts discussed whether to address the fact that about two-dozen “dummy assets” in the Delphinus portfolio were swapped out at the last minute for assets that “made the portfolio worse.” (Asked during congressional testimony about the use of dummy assets, two S&P execs told lawmakers they were unfamiliar with the practice in the CDO business.)
I perused the 581 pages of the email chain (pdf) linked above in the source article. The most I gathered is that the CDO market was coming at them so fast and furious they just DIDN’T keep-up in a responsible manner. The market exploded, literally.