Prosecutors Ask if 8 Banks Duped Rating Agencies

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Het onderstaande bericht: 'When I worked for Merrill Lynch Asset
Management one of the tasks I was given was to transmit ratings data,
with ratings values, to several ratings companies. I was told that this
was used to compare the rating that Merril gave funds with the rating
that the rating company calculated. The ratings that were published were
the ones I sent.'
Dit lijkt me een duidelijke 'lead' voor de onderzoekers ;)

Groet / Cees

May 12, 2010
Prosecutors Ask if 8 Banks Duped Rating Agencies
http://www.nytimes.com/2010/05/13/business/13street.html
By LOUISE STORY

The New York attorney general has started an investigation of eight
banks to determine whether they provided misleading information to
rating agencies in order to inflate the grades of certain mortgage
securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business
practices of a broad range of financial companies in the years before
the collapse of the housing market.

Where those investigations have focused on interactions between the
banks and their clients who bought mortgage securities, this one expands
the scope of scrutiny to the interplay between banks and the agencies
that rate their securities.

The agencies themselves have been widely criticized for overstating the
quality of many mortgage securities that ended up losing money once the
housing market collapsed. The inquiry by the attorney general of New
York, Andrew M. Cuomo, suggests that he thinks the agencies may have
been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit
Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now
owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch
Ratings and Moody’s Investors Service. Investors used their ratings to
decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that
described some of the techniques bankers used to get more positive
evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the
rating agencies who were hired by bank mortgage desks to help create
mortgage deals that got better ratings than they deserved, said the
people with knowledge of the investigation, who were not authorized to
discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office late
Wednesday night notifying the banks of his investigation, spokespeople
for Morgan Stanley, Credit Suisse and Deutsche Bank declined to comment.
Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs
spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs
improperly influenced rating agencies is without foundation. We relied
on the independence of the ratings agencies’ processes and the ratings
they assigned.”

Goldman, which is already under investigation by federal prosecutors,
has been defending itself against civil fraud accusations made in a
complaint last month by the Securities and Exchange Commission. The deal
at the heart of that complaint — called Abacus 2007-AC1 — was devised in
part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman
recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered
million-dollar pay packages to workers like Mr. Yukawa who had been
working at much lower pay at the rating agencies, according to several
former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in
his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings
with their former colleagues at the agencies. In the fall of 2007, when
banks were hard-pressed to get mortgage deals done, the Fitch analyst on
a Goldman deal was a friend of Mr. Yukawa, according to two people with
knowledge of the situation.

Mr. Yukawa did not respond to requests for comment.

Wall Street played a crucial role in the mortgage market’s path to
collapse. Investment banks bundled mortgage loans into securities and
then often rebundled those securities one or two more times. Those
securities were given high ratings and sold to investors, who have since
lost billions of dollars on them.

Banks were put on notice last summer that investigators of all sorts
were looking into their mortgage operations, when requests for
information were sent out to all of the big Wall Street firms. The
topics of interest included the way mortgage securities were created,
marketed and rated and some banks’ own trading against the mortgage market.

The S.E.C.’s civil case against Goldman is the most prominent action so
far. But other actions could be taken by the Justice Department, the
F.B.I. or the Financial Crisis Inquiry Commission — all of which are
looking into the financial crisis. Criminal cases carry a higher burden
of proof than civil cases. Under a New York state law, Mr. Cuomo can
bring a criminal or civil case.

His office scrutinized the rating agencies back in 2008, just as the
financial crisis was beginning. In a settlement, the agencies agreed to
demand more information on mortgage bonds from banks.

Mr. Cuomo was also concerned about the agencies’ fee arrangements, which
allowed banks to shop their deals among the agencies for the best
rating. To end that inquiry, the agencies agreed to change their models
so they would be paid for any work they did for banks, even if those
banks did not select them to rate a given deal.

Mr. Cuomo’s current focus is on information the investment banks
provided to the rating agencies and whether the bankers knew the ratings
were overly positive, the people who know of the investigation said.

A Senate subcommittee found last month that Wall Street workers had been
intimately involved in the rating process. In one series of e-mail
messages the committee released, for instance, a Goldman worker tried to
persuade Standard & Poor’s to allow Goldman to handle a deal in a way
that the analyst found questionable.

The S.& P. employee, Chris Meyer, expressed his frustration in an e-mail
message to a colleague in which he wrote, “I can’t tell you how upset I
have been in reviewing these trades.”

“They’ve done something like 15 of these trades, all without a hitch.
You can understand why they’d be upset,” Mr. Meyer added, “to have me
come along and say they will need to make fundamental adjustments to the
program.”

At Goldman, there was even a phrase for the way bankers put together
mortgage securities. The practice was known as “ratings arbitrage,”
according to former workers. The idea was to find ways to put the very
worst bonds into a deal for a given rating. The cheaper the bonds, the
greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by
publishing their rating models on their corporate Web sites. The
agencies argued that being open about their models offered transparency
to investors.

But several former agency workers said the practice put too much power
in the bankers’ hands. “The models were posted for bankers who develop
C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,”
one former rating agency employee said in an interview, referring to
collateralized debt obligations.

A central concern of investors in these securities was the
diversification of the deals’ loans. If a C.D.O. was based on mostly
similar bonds — like those holding mortgages from one region — investors
would view it as riskier than an instrument made up of more diversified
assets. Mr. Cuomo’s office plans to investigate whether the bankers
accurately portrayed the diversification of the mortgage loans to the
rating agencies.

----------------------------------------------------------------------
6. Jerry Greece May 13th, 2010 1:08 am
To suggest that S&P, Fitch, and Moody's were duped is almost as bad as
saying they played along with the scam.

A great many municipalities and counties had policies that *required*
their CFOs to invest only in institutions that held AAA ratings. These
small-town finance officers weren't "gambling on Wall St." They were
instead relying on the rating agencies to do their job. But they woke up
in 2008 to realize that their supposedly-safe investment choices had all
the allure of a bunch of bad bananas, thanks to the gross and perhaps
criminal negligence of the rating agencies.

And this investigation smells of bad bananas too -- the agencies are
trying to get folks to believe that they were shocked! shocked! to
discover that perhaps someone had fed them bad information, and that
they were the innocent dupes of manipulation.

Sorry, but in my book the rating agencies acted as badly as Wall St. did.

Misled? Only in the sense that a seasoned hooker woke up with a John she
later claimed was "awfully mean" to her. Don't believe that "I'm all
innocent" line for one minute.
  Recommend  Recommended by 18 Readers

1. Scott Chapel Hill, NC May 13th, 2010 1:08 am
Can we get our bailout money back from these thieves, allow them to
fail, and march the executives who ran them straight to jail?
  Recommend  Recommended by 17 Readers

4. Craig Fort Myers, FL May 13th, 2010 1:08 am
When I worked for Merrill Lynch Asset Management one of the tasks I was
given was to transmit ratings data, with ratings values, to several
ratings companies. I was told that this was used to compare the rating
that Merril gave funds with the rating that the rating company
calculated. The ratings that were published were the ones I sent. I have
no proof but I had the impression that Merril was the rating company and
the ratings companies were just publishers. I worked a Merril ten years
ago but this article does not surprise me.
  Recommend  Recommended by 15 Readers

7. kns new york, ny May 13th, 2010 1:08 am
Unfortunately, this probe paints ratings agencies as victims. The
Efficient Market Hypothesis posits that markets will function
efficiently when all market participants have access to the same
information. The availability of this information allows participants to
accurately price assets and ensure efficient exchanges between investors
and sellers. Intermediaries, such as ratings agencies, play a key role
in bridging the information gap between sellers and investors and in a
well-functioning market, the incentives of intermediaries are aligned
with their fiduciary responsibilities. In reality, the top three ratings
agencies are publicly traded companies and with that comes the inherent
pressure for earnings. As generating fees is an essential component of
profit, it seems that the incentives of the rating agencies companies
are not aligned with their mission to perform objective, high quality,
credit analysis.The fundamental issue is with the issue-pays model at
these agencies. CDOs and MBSs were complex debt instruments and ratings
agencies could charge upwards of 40% more than a rating for a "plain
vanilla" debt instrument (ie- corporare bonds or revolvers). With only a
handful of powerful banks issuing these debt instrument (which were very
lucrative to rate), these banks were able to exert considerable
influence to obtain the AAA ratings they needed to sell this crap at a
premium. And for the right price, the ratings agencies were more than
happy to compromise their models and help these banks reverse engineer
these structured products to obtain the necessary triple A rating.
Furthermore, when asked to accept culpability, the ratings agencies
plead their first amendment right to "express an opinion". While the
banks clearly played a role, it is high time that the media expose the
integral role the ratings agencies played in the subprime crisis. These
agencies abandoned their fiduciary duties in pursuit of profit. Unless
incentives for ratings agencies are realigned, these companies will
continue to fail the investing public they pretend to serve.

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