Over the last few days, it was announced that the DOJ had filed a suit against S&P regarding the AAA valuations they gave to crap securities. Barry over at the Big Picture has a very good summation of why the ratings agencies deserve to burn in hell. I would like to add the following to his great take down of these "credit enablers."
First, it used to be that less sophisticated fund managers would use a rating from a ratings agency as a primary reason for buying a bond. This was especially true in smaller markets where a portfolio manager either wore multiple hats or for whom finance was not his first line of business -- for example, small fraternal societies, smaller, regional banks, etc... In essence, the rating essentially did their job for them. That's is why what happened with S&P is so important.
Second, the agencies are going to lose. How do I know that? Email. A central component of all these cases is an email trail. And I guarantee you that after spending five years sifting through over 20 million pages of information, the DOJ has plenty of doozies. Within the confines of corporate communication, people say all sorts of incredibly stupid things that essentially incriminate themselves or the organization. As an example, read this report on the tax shelter industry that led to a criminal settlement with KPMG of over $600 million. In the KPMG investigation, an email trail was used multiple times to counter a witnesses statements and prove they were lying. I will bet anyone that the same situation exists here.
Third, the reason it takes so long to bring these cases is the size of the issue. Think about how many deals S&P rated over a 5 year period. I don't know for sure, but they were the preeminent player in the field. So, casting the widest net possible we now have literally the entire playing field of deals done in the credit boom. Now start to cull through all that data to the best cases to prosecute. Of all the deals the DOJ looks at, they're going to find the best. Remember, they get to pick their battlefield -- why not pick the ones with the greatest tactical advantage?
Fourth, like Barry I hope all of these agencies are destroyed by this case.
